Question

Continuing our W&WR story, to raise that $80,000 to replace the track, they sold bonds. Each bond sold for $1,000 (face or maturity value), has a maturity of 20 years and carries a 7% coupon.

You bought one of those bonds in 2015 from the W&WR.

Five years have passed – it is now 2020. You decide to sell your bond in the secondary market. Similar bonds now in 2020 have a coupon of 9%. What should be the value of your bond in 2020?

Answer 1

Value of the Bond = Present value of Future Interest and matutiry value discounted at Market yield.

Annual Interest receipt = face value * coupon rate = $1000*7% = $70

Maturity value =face value= $1000

Time to maturity = 15 years. [ 20 years total maturity nad 5 year has already been passed]

Present value of the Future interest receipt=

A = Annual coupon receipt = $70

y = market yield = 9% or 0.09 per annum

n = time to maturity = 15 year

hence,

Present value of the Future interest receipt=

=>Present value of the Future interest receipt = $564.25

Present value of the Maturity amount =

Value of the Bond = Present value of Future Interest and matutiry value discounted at Market yield.

=>value of your bond in 2020 = $564.25+$274.54= $838.79