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Bond Prices

Assume the following information for an existing bond that provides annual coupon payments:
Par value = $1,000
Coupon rate = 11%
Maturity = 4 years
Required rate of return by investors = 11%

a. What is the present value of the bond?
b. If the required rate of return by investors were 14% instead of 11%, what would be the present value of the bond?
c. If the required rate of return by investors were 9%, what would be the present value of the bond?

Solution Preview

Assume the following information for an existing bond that provides annual coupon payments:
Par value = $1,000
Coupon rate = 11%
Maturity = 4 years
Required rate of return by investors = 11%

a. What is the present value of the bond?

If the coupon rate = required rate of return, the present value (price) of the bond= par value = $ 1000

Calculating Present Value of bond
To calculate the present value of the bond we need to calculate / read from tables the values of
PVIF= Present Value Interest Factor
PVIFA= Present Value Interest Factor for an Annuity
Present Value of bond= PVIF * Maturity value + PVIFA * interest payment per period

PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
PVIF( n, r%)= =1/(1+r%)^n

Data
No of years to ...

Solution Summary

Bond price at different required rates of return have been computed.

$2.19