Question

Consider a 14-year, 9.5% corporate bond with face value $10,000. Assume that the bond pays semi-annual coupons. Compute the fair value of the bond today if the nominal yield-to-maturity is 11% compounded semi-annually. Please show working

Answer 1

Information provided:

Face value= future value= $10,000

Time= 14 years*2= 28 semi-annual periods

Coupon rate= 9.5%/2= 4.75%

Coupon payment= 0.0475*10,000= $475 per semi-annual period

Yield to maturity= 11%/2= 5.50% per semi-annual period

The fair value of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 47.50

I/Y= 5.50

N= 28

Press the CPT key and PV to compute the present value.

The value obtained is 8,940.89.     

Therefore, the fair value of the bond is $8,940.89.