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Calculating fair value of bond in the given cases

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Benson Incorporated has bonds with the following features: Par value of $1,000, maturity of 12 years, and a coupon rate of 8%. The yield to maturity is 6%. Please determine if the bond sells for a premium, par, or discount and explain your answer. Calculate the value of the bond if interest is paid on an annual basis versus a semi-annual basis. Show your work.

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Solution describes the steps to calculate fair value of bond in the given cases.

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In the given case yield to maturity (6%) is lower than coupon rate (8%), bond will sell at a premium.

Case 1, Coupon is paid on annual basis
C=Coupon = 1000*8%=$80
r= required rate of ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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