Question

Bond valuation Semiannual interest Find the value of a bond maturing in 9 years, with a $1,000 par value and a coupon interest rate of 9% (4.5% paid semiannually) if the required return on similar-risk bonds is 16% annual interest (8% paid semiannually). The present value of the bond is $ (Round to the nearest cent.)

Answer 1

Par value =1000

Interest rate. = 9% (semi annual interest rate = 9%/2 =4.5%)

Rate of return (r) = 16% (semi annual rate of return = 16%/2 =8%)

Interest (semi annually) = 1000*4.5% = 45

Maturity = 9 years

(Since it is semi annual bond interest will be paid twice in a year and hence no.of years = 18 (9*2))

Calculation of present value of the bond:

Year.   Description. Cash flow. DF (8%) Present value

(1) (2) (3) (4) (5) (3*4)

1-18. Interest. 45. 9.372. 421.74

18. Par value. 1000. 0.250. 250

Value of the bond.= 671.74

(Approximately) 672

*DF = 1/(1.08)^18