Question

(Bond valuation) Hamilton, Inc. bonds have a coupon rate of 15 percent. The interest is paid semiannually, and the bonds mature in 15 years. Their par value is $1 000. If your required rate of return is 12 percent, what is the value of the bond? What is the value if the interest is paid annually?

a. if the interest is paid semiannually, the value of the bond is?

Answer #1

We have to use PV function in EXCEL to find the value of the bond

=PV(rate,nper,pmt,fv,type)

a. If interest is paid semi-annually (2 periods in a year)

rate=required rate of return/2=12%/2=6%

nper=total number of periods=2*Years of maturity=2*15=30

pmt=semi-annual coupon payment=(coupon rate*face value)/2=(15%*1000)/2=150/2=75

fv=face value=1000

=PV(6%,30,75,1000,0)=$1206.47

Value of the bond if interest is paid semi-annually=$1206.47

b. If interest is paid annually,

rate=required arte of return=12%

nper=maturity years=15

pmt=annual coupon payment=150

fv=1000

=PV(12%,15,150,1000,0)=$1204.33

Value of the bond if interest is paid annually=$1204.33

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