Question

A major insurance company is reevaluating its bonds since it is planning to issue a new bond in the current market. The firm's outstanding bond issue has 7 years remaining till maturity. The bonds were issued with an 8 percent coupon rate (paid quarterly) and selling at par value. The required rate of return is 10 percent. What is the current value of these securities?

Answer 1

K = Nx4

Bond Price =∑ [(Quarterly Coupon)/(1 + YTM/4)^k]     +   Par value/(1 + YTM/4)^Nx4

k=1

K =7x4

Bond Price =∑ [(8*1000/400)/(1 + 10/400)^k]     +   1000/(1 + 10/400)^7x4

k=1

Bond Price = 900.18

or 90.018% of par