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1 April, 06:15

An investor purchases a 12-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is 5%, what is the current market value of the bond

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  1. 1 April, 09:36
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    Value of the bond = $862.013

    Explanation:

    The value of the bond is the present value of the future cash receipts expected from the bond. The value is equal to present values of interest payment and the redemption value (RV).

    Value of Bond = PV of interest + PV of RV

    The value of the bond can be worked out as follows:

    Step 1

    Calculate the PV of Interest payment

    Present value of the interest payment

    PV = Interest payment * (1 - (1+r) ^ (-n)) / r

    Interest payment = $40

    PV = 40 * (1 - (1.05) ^ (-12*2) / 0.05)

    = 40 * 13.7986

    = 551.945

    Step 2

    PV of redemption Value

    PV of RV = RV * (1+r) ^ (-n)

    = 1000 * (1.05) ^ (-12*2)

    = 310.067

    Step 3

    Calculate Value of the bond

    = 551.94567 + 310.067

    =862.01

    Value of the bond = $862.013
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