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22 May, 23:05

Calculate the value of a bond that matures in 12 years and has a $ 1 comma 000 par value. The annual coupon interest rate is 13 percent and the market's required yield to maturity on a comparable-risk bond is 11 percent.

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  1. 22 May, 23:58
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    Price of bond=$ 1,129.847

    Explanation:

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

    Value of Bond = PV of interest + PV of RV

    Step 1

    PV of interest payments

    annul interest payment

    = 13% * 1000 = 130

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

    Annual yield - r = 11% per annum

    Total period to maturity - n = 12 years

    PV of interest

    =130 * (1 - 1.11^ (-12)) / 0.11

    = 844.00

    Step 2

    PV of Redemption Value

    = 1,000 * (1.11) ^ (-12)

    = 285.84

    Step 3

    Total PV = 844.00 + 285.84 = 1129.847123

    Price of bond=$ 1,129.8471
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