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Bond Valuation

Consider the two bonds described below

Bond A Bond B
Maturity(years) 15 20
Coupon rate(0%) 10 6
Paid semiannually
Par Value $1,000 $1,000

a. If both bonds had a required return of 8%, what would the bonds' price be?

b. Describe what it means if a bond sells at a discount, a premium, and at its face amount (par value). Are these two bonds selling at a discount, premium, or par?

c. If the required return on the two bonds rose 10%, what would the bonds' prices be?

Solution Preview

a. If both bonds had a required return of 8%, what would the bonds' price be?

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

Bond A

Coupon payment is equal to $1,000 x 10% = 100/2 = 50

B = 50 x [1 - ...

Solution Summary

This solution is comprised of a detailed explanation to answer if both bonds had a required return of 8%, what would the bonds' price be, describe what it means if a bond sells at a discount, a premium, and at its face amount (par value) and answer whether these two bonds selling at a discount, premium, or par, and if the required return on the two bonds rose 10%, what would the bonds' prices be.

$2.19