2. (Related to Checkpoint 9.3) (Bond valuation) Calculate the value of a bond th
ID: 2710749 • Letter: 2
Question
2. (Related to Checkpoint 9.3) (Bond valuation) Calculate the value of a bond that matures in 18 years and has a $1,000 par value. The annual coupon interest rate is 14 percent and the markets required yield to maturity on a comparable-risk bond is 15 percent. The value of the bond is $[]. (Round to the nearest cent) 3. (Related to Checkpoint .4l (Bond valuation) A bond that matures in 10 years has a $1,000 par value. The annual coupon interest rate is 8 percent and the market?s required yield to maturity on a comparable-risk bond is 12 percent. What would be the value of this bond if it paid interest annually? What would be the value of this bond if it paid interest semiannually? a. The value of this bond if it paid interest annually would be $(Round to the nearest cent.) b. The value of this bond if it paid interest semiannually would be $. (Round to the nearest cent.)Explanation / Answer
Approximate Yield-to-Maturity Percentage
=
Annual Interest Payment + (Par Value - Bond Price)/Number of Years until Maturity
(Par Value + Bond Price)/2
Par value =1000
Year to maturity 18
Year to maturity 10
Coupom=80
Let the bond price =x
0.12 = [80 +(1000-x)/10]/(1000+x)/2
Or, 0.12(1000+x)= (800+1000-x)/5
Or , 0.60(1000+x)=1800-x
Or . 600+0.60x =1800-x
Or, x=750
So Bond price =$750
If interest paid semi annually @8% , the effective coupon payment becomes 8.16%
Effective coupon value is $81.6
0.12 = [81.6 +(1000-x)/10]/(1000+x)/2
Or, 0.12(1000+x)= (816+1000-x)/5
Or , 0.60(1000+x)=1816-x
Or . 600+0.60x =1816-x
Or, x=760
So Bond price will be $760 when interest paid semi annually
Approximate Yield-to-Maturity Percentage
=
Annual Interest Payment + (Par Value - Bond Price)/Number of Years until Maturity
(Par Value + Bond Price)/2
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