Question

1. What is the value of a $1,000 par value bond that has a 10% annual coupon, and has ten years until maturity if the required rate of return (rd) is 8%.

2. What is the value of a $1,000 par value bond with a 8% coupon, paid semi-annually, which has 10 years until maturity and a required rate return of 12%.

3. What is the value of a zero coupon bond which matures in 20 years if the required rate of return is 8%.

Answer 1

1. No of coupon payments (N) = 10

Face Value (Future Value) = $1000

Required return (Yield) = 8%.a.

Annual coupon (PMT) = $1000 x 10% = $100

Price of bond = PV of bond = ??

Using financial calculator or PV function in excel,

PV = Price of bond = $ 1134.20

2. No of coupon payments (N) = 20 (10years x 2)

Face Value (Future Value) = $1000

Required return (Yield) = 12% p.a. = 6% per semi-annum

Semi-annual coupon (PMT) = $1000 x 8% x 6/12 = $40

Price of bond = PV of bond = ??

Using financial calculator or PV function in excel,

PV = Price of bond = $ 770.60

3. Value of zero coupon bond = future value / (1+yield)^tenure

Value of zero coupon bond = 1000 / (1+8%)²⁰ = $ 214.55

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