1. Calculate the value of a bond that matures in 18 years and has a $1000 par va
ID: 2757926 • Letter: 1
Question
1. Calculate the value of a bond that matures in 18 years and has a $1000 par value. The annual coupon interest rate is 12% and the market's required yield to maturity on a comparable risk bond is 9 percent.
The value of the bond is $____ (round to nearest cent)
2. A bond that matures in 11 years has a $1000 par value. the annual coupon interest rate is 11% and the market's required yield to maturity on a comparable risk bond is 14%. What would be the value of this bond if its paid interest annually? What would be the value of this bond if it paid interest semiannually? (ROUND TO NEAREST CENT)
Explanation / Answer
Value of bond = Present value of all future earnings.
= Present value of all interest payments + Present value of redemptipn value
YTM is the required rate of return of the investor and should be used while discounting the earnings from the bond.
1. value of bond = 120 x PVIFA (9% , 18) + 1000 x PVIF (9% , 18)
= 120 x 8.756 + 1000 x 0.212
= $1262.72
2. If interest is paid annually
Value of bond = 110 x PVIFA (14% , 11) + 1000 x PVIF (14% , 11)
= 110 x 5.453 + 1000 x 0.237
= $836.83
If interest is paid semi annually
Value of bond = 55 x PVIFA (7% , 22) + 1000 x PVIF (7% , 22)
= 55 x 11.061 + 1000 x 0.226
= $834.355
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