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 / 1.0178^{6} =
.8996

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