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A bond that matures in 18 years has a ?$1,000 par value
A bond that matures in 18 years has a ?$1,000 par value. The annual coupon interest rate is 9 percent and the? market's required yield to maturity on a? comparable-risk bond is 13 percent. What would be the value of this bond if it paid interest? annually? What would be the value of this bond if it paid interest? semiannually?
a. The value of this bond if it paid interest annually would be ?$
Expert Solution
Computation of Value of Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
a. The value of this bond if it paid interest annually:
Here,
PV = Value of Bond = ?
Rate = 13%
Nper = 18 years
PMT = $1,000*9% = $90
FV = $1,000
Substituting the values in formula:
=-pv(13%,18,90,1000)
PV or Value of Bond = $726.40
b. The value of this bond if it paid interest semiannually:
Here,
PV = Value of Bond = ?
Rate = 13%/2 = 6.5%
Nper = 18 years *2 = 36 periods
PMT = $1,000*9% = $90/2 = $45
FV = $1,000
Substituting the values in formula:
=-pv(6.5%,36,45,1000)
PV or Value of Bond = $724.19
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