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    Valuation of Bonds

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    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?

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    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

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