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Calculating fair value of a bond.

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A corporation is planning to sell $5M worth (face value) of 10 year bonds to finance a major expansion. They intend to sell 2,500 bonds with a face value of $2,000. They will give 10% interest (of the face value of the bonds) payable annually at the end of each of the 10 years. At the end of 10 years, in addition to the interest, they will pay each of the bond holders the face value of the bond. What can they expect to receive for the bonds (i.e. the selling price) if investors expect to earn 12% on their investment before taxes?

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Solution Summary

Solution explains the steps to calculate fair value of a coupon paying bond.

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Solution:

Annual Interest =C=10% of face value=2000*10%=$200
Number of interest payments=n=10
Maturity ...

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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