Knight, Inc., has issued a three-year bond that pays a coupon
rate of 4.84 percent. Coupon payments are made semiannually. Given
the market rate of interest of 3.56 percent, what is the market
value of the bond? (Round answer to 2 decimal places,
Bond Valuation: The value of bond is the present value of the expected cashflows from the bond,discounted at an interest rate that is appropriate to the riskness of that bond.
|Year||Cash flow||PVAF/[email protected]%||Present Value (Cashflow*PVAF/PVF)|
Current Market Price of Bonds = $1036.17(136.57+899.60)
Note : Since the bond makes semiannual interest payments, total no. of period is 6 (3*2), cashflow per period is 24.2(1000*4.84%/2) and cashflows are discounted at 1.78% (3.56/2). You can take $1,000 as face value of bond when no information is provided.
*PVAF = (1-(1+r)-n)/r = (1-1.0178-6)/.0178 = 5.6433
**PVF = 1 / (1+r)n = 1 / 1.01786 = .8996
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