Calculate the value of a bond that matures in 12 years and has a $1,000 par...

Question

Question

Calculate the value of a bond that matures in 12 years and has a $1,000 par value. The annual coupon interest rate is 14

percent and the market's required yield to maturity on a comparable-risk bond is 12 percent.

The value of the bond is_____?

Answer 1

Answer #1

Annual coupon=1000*14%=140

Hence value of bond=Annual coupon*Present value of annuity factor(12%,12)+$1000*Present value of discounting factor(12%,12)

=140*6.194374225+$1000*0.256675092

=$1123.89(Approx).

NOTE:

1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=140[1-(1.12)^-12]/0.12

=140*6.194374225

2.Present value of discounting factor=1000/1.12^12

=1000*0.256675092

Answer 2

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