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# Estimating the fair value of a bond

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BioMax Inc. offers an 8 percent coupon bond that has a \$1,000 par value, semiannual coupon payments and 20 years of its original 25 years left to maturity. Which of the following statements is true if the market return on similar bonds is 10%?

a. The bond will sell at a premium of \$1,198 because the coupon rate is greater than the market interest rate.
b. The bond will sell at a discount of \$828 because the coupon rate is greater than the market interest rate.
c. The bond will sell at a premium of \$1,198 because the coupon rate is less than market interest rate.
d. The bond will sell at a discount of \$828 because the coupon rate is less than the market interest rate.

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#### Solution Preview

See attached Excel file for solution.

Face Value=FV=\$1,000
Coupon ...

#### Solution Summary

Solution provides the calculations to estimate the current value of a bond in MS Excel format.

\$2.19

## Bond value is assessed.

1. Find the value of a bond with the following characteristics: (a) face value of \$1,000, (b) 8% coupon rate, (c) the bond matures in 14 years, (d) the market rate of interest is 6%.

2. Is the bond priced in question 1 selling at a discount or premium to its par value?

3. Using the information from question 1: the market rate of interest has risen to 10% and one year passed. How much would you be willing to pay for the bond now?

4. Using the information from question 1, determine whether the bond is selling at a premium, discount, or par value.

5. Using the information from question 1, another year goes by and the market rate of interest drops down to 8%. Is the bond currently selling at discount to par, premium to par, or at par value.

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