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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?

#### 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