Question

Greshak Corp wishes to float a bond that pays interest at a rate of 5.75% semi-annually. The par value of the bond is $1,000 and its term is fourteen years. If the current yield to maturity (i.e. the current market discount rate) of that bond is 6.25%, what is the current fair market value of that bond?  

Answer 1

Coupon Rate = 5.75% Payable Semi annually

Term = 14 Years

Yield to Maturity= 6.25%

Par Value = $ 1,000

Price of Bond = Present Value of all future expected Cashflows

Price of Bond = Present Value of Coupon Payments and Redemption Amount

Price of Bond = [( $ 1,000*5.75%)/2* PVAF((6.25/2)%, (14*2) periods)] + [$ 1,000 * PV((6.25/2)%, (14*2) period)]

Price of Bond = [$ 28.75 * PVAF(3.125%, 28 periods)] + [$ 1,000 * PV(3.125%, 28 period)]

Price of Bond = [$ 28.75 * 18.4801] + [$ 1,000 * 0.4225]

Price of Bond = $ 531.32 + $ 422.48

Fair Market Value of Bond = $ 953.80

Computation of PVAF:
r	n	1+r	(1+r)^-n	1- [(1+r)^-n]	[1- [(1+r)^-n]] /r
3.125%	28 Periods	1.0313	0.4225	0.5775	18.4800