Question

(Bond valuation) A bond that matures in

10years has a $1,000

par value. The annual coupon interest rate is 9

percent and the? market's required yield to maturity on a? comparable-risk bond is 15

percent. What would be the value of this bond if it paid interest? annually? What would be the value of this bond if it paid interest? semiannually?

Answer 1

Annual Coupon Payment:

Par Value = $ 1000, Coupon Rate = 9 % per annum, YTM = 15 % and Tenure = 10 years

Annual Coupon = 0.09 x 1000 = $ 90

Therefore, Bond Value = 90 x (1/0.15) x [1-{1/(1.15)^(10)}] + 1000 / (1.15)^(10) = $ 698.87

Semi-Annual Coupon:

Par Value = $ 1000, Coupon Rate = 9 % per annum or 4.5 % per half-year, YTM = 15 % and Tenure = 10 years or 20 half-years

Semi - Annual Coupon = 0.09 x 1000 x 0.5 = $ 45

Therefore, Bond Value = 45 x (1/0.075) x [1-{1/(1.075)^(20)}] + 1000 / (1.075)^(20) = $ 694.16