Share With

BOND VALUATION You are considering a 10-year, $1,000 par value bond.

Its coupon rate is 9%, and interest is paid semiannually.

If you require an "effective" annual interest rate (not a nominal rate) of 8.16%, how much should you be willing to pay for the bond?

pur-new-sol

Computation of the price of bond:-

Price of bond = (Coupon payment*((1-1/(1+rate)^n)/rate))+(FV/(1+rate)^n)

Here,

Coupon payment = $1,000*9%/2 = $45

n = 10*2 = 20 periods

rate = (1+EAR)^(1/n)-1

= (1+8.16%)^(1/2)-1

= 1.0400 - 1

= 4.00%

Price of bond = ($45*((1-1/(1+4%)^20)/4%))+($1,000/(1+4%)^20)

= ($45*13.5903)+($1,000/2.1911)

= $611.56 + $456.39

= $1,067.95

Related Questions