# Estimating the current value of given bond

Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7% and four years remaining until maturity. The par value of the bond is $1,000, and the bond pays interest annually.

a) Determine the current value of the bond if present market conditions justify a 14% required rate of return.

b) Supposing Twin Oaks's four-year bond had semiannual coupon payments. What would be its current value? (Assume a 7% semiannual rate of return. However, the actual rate would be slightly less than 7% because a semiannual coupon bond is slightly less risky than an annual coupon.)

c) Assuming that Twin Oak' bond had a semiannual coupon but 20 years remaining to maturity. What is the current value under these conditions? (Assume a 7% semiannual rate of return. However, the actual rate would be slightly less than 7%, although the actual rate would probably be greater than 7% because of increased price risk.)

© BrainMass Inc. brainmass.com April 3, 2020, 10:24 pm ad1c9bdddfhttps://brainmass.com/business/business-math/estimating-the-current-value-of-given-bond-438811

#### Solution Preview

Please refer attached file for solution in MS Excel.

a) Determine the current value of the bond if present market conditions justify a 14% required rate of return.

Maturity amount=M=$1000

Coupon Amount=1000*7%=$70

Number of coupon payments left=n=4

Required rate of return=r=14%

Current price of bond=C/r*(1-1/(1+r)^n)+M/(1+r)^n

=70/14%*(1-1/(1+14%)^4)+1000/(1+14%)^4

...

#### Solution Summary

Solution describes the steps to calculate current value of a bond by using formulas as well as by using functions in MS Excel.