"A coupon bond that pays interest quarterly has a par value of $1000, matures in 5 years, and has a yield to maturity of 16%. If the coupon rate is 10%, the value of the bond today will be __________. Note: Express your answers in strictly numerical terms. For example, if the answer is $500, write enter 500 as an answer."
Answer : Calculation of Value of Bond Today :
Value of Bond = [Coupon * PVAF @YTM% for n periods] + [Par Value * PVF @YTM% for nth period]
where,
Coupon = 1000 * 10% = 100 / 4 = 25 (Divided by 4 as coupon paid quarterly)
YTM = 16% / 4 = 4% (Divided by 4 as coupon paid quarterly)
n is the number of period = 5 * 4 = 20 (Multiplied by 4 as coupon paid quarterly)
Value of Bond = [25 * PVAF @4% for 20 periods] + [1000 * PVF @4% for 20th period]
= [25 * 13.5903263437] + [1000 * 0.45638694612]
= 339.758158592 + 456.38694612
= 796.145104712 or 796
Therefore value of the bond today will be 796
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