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Bond Value Calculation

You own a bond that pays $100 in annual interest, with a $1000 par value.It matures in 15 years. Your required rate of return is 12 percent.

a) Calculate the value of the bond.
b) How does the value change if your required rate of return (1) increases to 15 percent or (2) decreases to 8 percent?
c) Explain the implications of your answers in part b as they relate to interest rate risk , premium bonds, and discount bonds.
d) Assume that the bond matures in 5 years instead of 15 years. Recompute your answers in part b.

Solution Preview

You own a bond that pays $100 in annual interest, with a $1000 par value. It matures in 15 years. Your required rate of return is 12 percent.

a) Calculate the value of the bond.

Bond price can be calculated by using the formula as shown below.

where B is the current bond price
C is the coupon payment
r is the cost of debt or yield to maturity
n is the period

B = 100 x [1 - 1 ] + 1,000
(1 ...

Solution Summary

This solution is comprised of a detailed explanation to calculate bond value.

$2.19