Question

P6-26 (similar to) Question Help Bond valuation Quarterly interest Calculate the value of a $500-par-value bond paying quarterly interest at an annual coupon interest rate of 14% and having 14 years until maturity if the required return on similar-risk bonds is currently a 11% annual rate paid quarterly The present value of the bond is 5 (Round to the nearest cent) Enter your answer in the answer box and then click Check Answer All parts showing Clear All Check Answer

Answer 1

The value of the bond is computed as shown below:

The coupon payment is computed as follows:

= 14% / 4 x $ 500 (Since the payments are being made quarterly, hence divided by 4)

= $ 17.5

The YTM is computed as follows:

= 11% / 4 (Since the payments are being made quarterly, hence divided by 4)

= 2.75% or 0.0275

N is computed as follows:

= 14 x 4 (Since the payments are being made quarterly, hence multiplied by 4)

= 56

So, the value of the bond is computed as follows:

= Coupon payment x [ [ (1 - 1 / (1 + r)ⁿ ] / r ] + Par value / (1 + r)ⁿ

= $ 17.5 x [ [ (1 - 1 / (1 + 0.0275)⁵⁶ ] / 0.0275 ] + $ 500 / 1.0275⁵⁶

= $ 17.5 x 28.40415454 + $ 109.4428751

= $ 606.52 Approximately

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