Question

# A bond that matures in 17 years has a ​\$1 000 par value. The annual coupon...

A bond that matures in 17 years 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 17 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? _______

Calculation for annual interest payment:

Par value is \$1000
Time period is 17 years
Annual coupon rate is 14%
Annual coupon payment =(Coupon rate)*(Par value)=(14%)*(1000)=140
Yield to maturity=17%

We can determine the present value using excel as: Answer: If the interest is paid annually, then the value of the bond will be equal to \$835.76.

Calculation for semiannual interest payment:

Par value is \$1000
Time period is 17 years, as the interest is paid semiannually, the number of periods=17*2=34

Semi annual coupon payment=(Annual coupon payment)/2=140/2=70
Annual yield to maturity=17%
Semiannual yield to maturity=17%/2=0.085
We can determine the present value using excel as: Answer: If the interest is paid semi annually, then the value of the bond will be equal to \$834.55

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