Question

BSW Corporation has a bond issue outstanding with an annual coupon rate of 7 percent paid quarterly and four years remaining until maturity. The par value of the bond is $1,000. Determine the fair present value of the bond if market conditions justify a 14 percent, compounded quarterly, required rate of return

Answer 1

Number of periods = 4*4 = 16

Coupon rate per quarter = 7%/4 = 1.75%

so coupon payment per period = 1.75% * 1000 = $17.5

Discount rate per quarter = 14%/4 = 3.5%

Calculation of Fair present value of bond

Quarter	Cash flow	PVF @ 3.5%	PV
1	17.5	0.96618357	16.91
2	17.5	0.9335107	16.34
3	17.5	0.90194271	15.78
4	17.5	0.87144223	15.25
5	17.5	0.84197317	14.73
6	17.5	0.81350064	14.24
7	17.5	0.78599096	13.75
8	17.5	0.75941156	13.29
9	17.5	0.73373097	12.84
10	17.5	0.70891881	12.41
11	17.5	0.68494571	11.99
12	17.5	0.6617833	11.58
13	17.5	0.63940415	11.19
14	17.5	0.61778179	10.81
15	17.5	0.59689062	10.45
16	17.5	0.57670591	10.09
16	1000	0.57670591	576.71
		Total	788.35

So fair present value of bond = $788.35