Question

Calculate the value of a bond that will mature in 20 years and has a SAR 1,000 face value. The annual coupon interest rate is 5 percent, and the investor's required rate of return is 7 percent. Interest is paid annually.

Answer 1

The value of bond in this question can be calculated using the financial calculator.

The bond matures in 20 years (No. of years is 20). Also the coupon payments are done at yearly basis.

The face value of the bond is repaid at the end of the term. Hence, FV = 1,000

The annual coupon interest is paid at 5% of the face value. Thus.

Coupon = 5% * 1,000

Coupon = SAR 50 (PMT)

The investor's required rate of return (YTM) is 7%. (Hence, 1/Y = 7)

We shall put the following inputs in the financial calculator:

N = 20

(1/Y) = 7

PMT = 50

FV = 1,000

Press CPT -> PV

Thus is gives us value/ price of bond as $ 788.12

Note: The Answer in the calculator shall appear as -$788.12 as the calculator assumes we have to pay (outflow) this amount to receive the coupon and final face value.