Estimating Value of Bond
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A) Marigold Merchants has an outstanding issue of $1,000 par value bonds with an 8% coupon interest rate. The issue pays interest annuallly and has 15 years remaining to its maturity date. Bonds of similar risk are currently yielding a 10% rate of return. What is the value of these Marigold Merhant bonds?
Is the bond selling at a discount or premium, and why?
b) Marigold Merchants also has an outstanding issue of $1,000 par value bonds with a 12% interest rate. The issue pays interest semiannually and has 10 years remaining to maturity. Bonds of similar risk are currently selling to yield a 10% rate of return. What is the value of these Marigold Merchants bonds?
Is the bond selling at a discount or premium, and why?
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Solution Summary
Solution describes the steps to estimate value of coupon paying bond. It also determines whether the bond is selling at premium or at discount.
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Solution:
a)
No. of coupon payments left=n=15
Requited rate of return=r=10%
Coupon Amount=C=1000*8%=$80
Maturity Amount=M=$1000
The Fair value of a bond is given by
Value of bong = Present value of annual coupon payments + Present value of ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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