A bond that matures in 15 years has a $1000 par value. The annual coupon interest rate is 8 percent and the market's required yield to maturity on a comparable-risk bond is 15 percent. What would be the value of this bond if it paid interest annually? What would be the value of this bond if it paid interest semiannually?
Details of Bond
Face Value | $1000 |
Coupon Rate | 8% |
YTM | 15% |
Maturity | 15years |
Coupon Payment Annually | 8%*1000 =$80 |
Coupon Payment Half Yearly | 8%*100/2 = $40 |
Value of Bond if Coupon Payment is Annual
Value = 80(P/A,15%,15) +1000(P/F,15%,15)
from Compound interest table , value of P/A and P/F are taken
Value= 80*5.847 + 1000*0.122 = $589.76
Value of Bond if Coupon Payment is Semi Annual
In case of semiannual the interest rate is divided by 2 as in one year now due to semiannual calculation there will be 2 compounding periods and as a result time period gets doubled
Value = 40(P/A,15%/2,15*2) +1000(P/F,15%/2,15*2)
Value = 40(P/A,7.5%,30) +1000(P/F,7.5%,30)= 40*11.810 + 1000*0.144 = $616.4
A bond that matures in 15 years has a $1000 par value. The annual coupon interest...
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