# Bond Valuation / Time Value of Money

Valuing a Bond, A company issues a bond with semiannual interest payments of $45 for 10 years and a lump-sum repayment of the $1,000 face value of the bond after 10 years. If the bond market requires 10% interest compounded semiannually for the debt issued by the company, what is the market price (present value) of the bond?

Accumulating a target level of wealth, Carolyn Martin, who is now 30 years old, wants to retire at age 60 with $2.5 million in an investment account. If funds can be invested to earn 12% per year compounded annually, what equal annual amount must she invest at the end of the each year? What will be the required amount if the funds are invested to earn 12% per year compounded semiannually?

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#### Solution Preview

Valuing a bond - The market price of the bond is the present value of interest and principal. The interest amount is $45 every six months, principal amount is $1,000, periods to maturity are 10X2=20 for semi annual and the discounting rate is 10%/2=5% for semi annual. The interest amount is an annuity and so the PV factor is ...

#### Solution Summary

The solution explains how to calculate the price of a bond and the amount of savings needed to reach a target level of wealth