Question

Calculate the value of a bond that matures in 12 years and has a $ 1 comma 000 par value. The annual coupon interest rate is 13 percent and the​ market's required yield to maturity on a​ comparable-risk bond is 11 percent.

Answer 1

Price of bond=$ 1,129.847

Step-by-step explanation:

The value of the bond is the present value(PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).

Value of Bond = PV of interest + PV of RV

Step 1

PV of interest payments

annul interest payment

= 13% × 1000 = 130

PV = A × ( (1- (1+r)^(-n))/r

Annual yield - r= 11% per annum

Total period to maturity- n = 12 years

PV of interest

=130× (1- 1.11^(-12) )/0.11

= 844.00

Step 2

PV of Redemption Value

= 1,000 × (1.11)^(-12)

= 285.84

Step 3

Total PV = 844.00 + 285.84 = 1129.847123

Price of bond=$ 1,129.8471