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An 8% Commonwealth government treasury bond has five years to maturity
An 8% Commonwealth government treasury bond has five years to maturity. Given that the bond pays interest semi-annually and an interest payment has just been made, what is the current value of the bond if the market interest rate is 11% and the face value of the bond is $100,000?
Expert Solution
Computation of Current Value of Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Current Value of Bond = ?
Rate = Market Interest Rate = 11%/2 = 5.5% compounded semiannually
Nper = Number of Periods to Maturity = 5 Years * 2 = 10 Periods
PMT = Periodic Coupon Payment = $100,000*8%/2 = $4,000
FV = Face Value = $100,000
Substituting Values in formula:
=-pv(5.5%,10,4000,100000)
PV or Current Value of Bond = $88,693.56
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