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A financial analyst observes a 3 year, 11% semi-annual bond which has a face value of $2,000. The analyst believes that the yield-to-maturity on the bond should be 15.00% annually. Based on this, what should be the value of the bond?

a. Value of Bond is $779.60.
b. Value of Bond is $587.60.
c. Value of Bond is $1,812.25.
d. Value of Bond is $30,000.00.

User Wilf
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1 Answer

7 votes

Final answer:

The value of a bond is calculated by discounting the future cash flows at the yield-to-maturity rate. For a 3 year, 11% semi-annual bond with a face value of $2,000 and a YTM of 15%, one needs to discount the six coupon payments and the final face value payment to get the bond's present value.

Step-by-step explanation:

The value of a bond can be determined by discounting the future cash flows of the bond payments at the required yield-to-maturity (YTM). In this scenario, the bond pays 11% semi-annually on a face value of $2,000, leading to interest payments of $110 every six months. The financial analyst is estimating the bond's value using a YTM of 15%, so we must discount these payments at this rate.

To find the present value of each payment, the formula PV = C / (1+r)^n is used, where C is the coupon payment, r is the discount rate (YTM / 2), and n is the number of periods. For this 3-year semi-annual bond, there will be six total interest payments of $110, plus the final principal payment of the face value.

To calculate the present value of the bond, we sum the present values of all future payments:

•PV of interest payments = $110 / (1+0.075)^1 + $110 / (1+0.075)^2 + ... + $110 / (1+0.075)^6
•PV of face value = $2,000 / (1+0.075)^6
After computing these, we can add them to find the final value of the bond.

User Amir Mgh
by
8.0k points
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