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A ten-year bond, with par value equals $1000, pays 10% annually. If similar bonds are currently...

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Finance

A ten-year bond, with par value equals $1000, pays 10% annually.If similar bonds are currently yielding 6% annually, what is themarket value of this bond? Use semi-annual analysis. Please showall work and no financial calculators are allowed for theproblem..

Answer & Explanation Solved by verified expert
4.5 Ratings (737 Votes)

Value of bond is the present value of cash flows from bond.
Present value of coupon $       50.00 x 14.877475 = $     743.87
Present value of Par value $ 1,000.00 x 0.5536758 = $     553.68
Present value of cash flows from bond $ 1,297.55
So, bond's current selling price is $ 1,297.55
Working:
# 1 Semi annual coupon interest = Par Value * Semi annual coupon rate
= 1000*10%*6/12
= $       50.00
# 2 Present value of annuity of 1 = (1-(1+i)^-n)/i Where,
= (1-(1+0.03)^-20)/0.03 i 6%/2 = 0.03
= 14.877475 n 10*2 = 20
# 3 Present value of 1 = (1+i)^-n
= (1+0.03)^-20
= 0.5536758

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A ten-year bond, with par value equals $1000, pays 10% annually.If similar bonds are currently yielding 6% annually, what is themarket value of this bond? Use semi-annual analysis. Please showall work and no financial calculators are allowed for theproblem..

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