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    Estimating the current value of given bond

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    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.)

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    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.

    $2.19

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