Question

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, e.g. 15.25.)

Answer 1

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)
1-6	24.2	5.6433*	136.57
6	1000	0.8996**	899.60

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