Calculate the value of a bond that will mature in 8 years' time and has a $1000 face value

Business Dec 01, 2020

Calculate the value of a bond that will mature in 8 years' time and has a $1000 face value. The coupon interest rate is 9%p.a. paid annually and the bond investor's required rate of return is 12%.

(b) If the Market Price of the bond is $930, should the investor purchase the bond? (Give a reason for your answer

Expert Solution

Computation of Value of Bond using PV Function in Excel:

=-pv(rate,nper,pmt,fv)

Here,

PV = Value of Bond = ?

Rate = 12%

Nper = 8 years

PMT = $1,000*9% = $90

FV = $1,000

Substituting the values in formula:

=-pv(12%,8,90,1000)

PV or Value of Bond = $850.97

Market price of bond is higher than its expected value. So, this bond should not be purchased.

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