Question

(Bond valuation) A bond that matures in 20 years has a $1,000 par value. The annual coupon interest rate is 7 percent and the market's required yield to maturity on a comparable-risk bond is 13 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

1.Value of the bond if interest is paid annually:

Future value= $1,000

Time= 20 years

Yield to maturity= 13%

Coupon interest= 7%

Coupon payment= 0.07*1,000= $70

The value of the bond is calculated using a financial calculator.

The below has to be entered in the financial calculator:

FV= 1,000; N= 20; I/Y= 13; PMT= 70

Press CPT and PV to calculate the value of the bond.

The value of the bond is
**$578.51.**

2. Value of the bond if interest is paid annually:

Future value= $1,000

Time= 20 years*2= 40 semi-annual periods

Yield to maturity= 13%/2= 6.50%

Coupon interest= 7%/2= 3.50%

Coupon payment= 0.035*1,000= $35

The value of the bond is calculated using a financial calculator.

The below has to be entered in the financial calculator:

FV= 1,000; N= 40; I/Y= 6.50; PMT= 35

Press CPT and PV to calculate the value of the bond.

The value of the bond is
**$575.63.**

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