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Valuation of Bonds

1. What is the price today of a 2-year 9% coupon bond that has a par value of $1,000 and a required rate of return of 9%?

2. You have invested in a bond that pays semiannual coupon payments of $40 and has a par value of $1,000. The bond matures in 1 year, and its required rate of return is 10% compounded semiannually. Determine the bond's present value.

3. A $1,000 par value bond with an 8.5% coupon and 2 years until maturity is priced at $1,008.91.

a. What is the bond's yield to maturity using annual coupons and annual compounding and
b. also using semiannual coupons and semiannual compounding?

Solution Preview

Valuation of Bonds

1. What is the price today of a 2-year 9% coupon bond that has a par value of $1,000 and a required rate of return of 9%?

We need to calculate how much the bonds have been issued by using the formula as follows: -

where B is the issued price/current price
C is the coupon payment
r is the current interest rate
n is the period

Assume it is paying annual coupon.

Coupon payment is equal to $1,000 x 9% = 90

B = 90 x [1 - 1 ] + 1,000
(1.09)2 (1.09)2
0.09

B = 1,000
2. You have invested in a bond that pays semiannual coupon payments of $40 and has a par value of ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is the price today of a 2-year 9% coupon bond that has a par value of $1,000 and a required rate of return of 9%, what is the bond's present value, and what is the bond's yield to maturity using annual coupons and annual compounding and also using semiannual coupons and semiannual compounding.

$2.19