Assume a $1000 face value bond has a coupon rate of 9

Finance Aug 12, 2020

Assume a $1000 face value bond has a coupon rate of 9.5% paid semi annually and has an eight-year life. If investors are willing to accept a 12 percent rate of return on bonds of similar quality, what is the present value or worth of this bond?

Expert Solution

We can calculate the present value of the bond by using the following formula in excel:-

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

Here,

PV = Present value

Rate =12%/2 = 6% (semiannual)

Nper = 8*2 = 16 periods (semiannual)

Pmt = Coupon payment = $1,000*9.5%/2 = $47.50

FV = $1,000

Substituting the values in formula:

=-pv(6%,16,47.50,1000)

= $873.68

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