Question #51314

Power of Tower Inc. has bonds that mature in 6½ years with a par value of RM1,000.
They pay a coupon rate of 9% with semiannual payments. If the required rate of
return on these bonds is 11% what is the bond's current value?

Expert's answer

N = 6½ years, F = RM1,000, if = 9% with semiannual payments, i = 11%.

The bond's current value is:

P = F*if((1 - (1 + i)^-n)/i) + F(1 + i)^-n

where:

C = F * iF = coupon payment

N = number of payments

i = market interest rate, or required yield, M = face value

P = market price of bond.

P = 1000*0.09*((1 - 1/1.11^13)/0.11) + 1000/1.11^13 = RM865.

The bond's current value is:

P = F*if((1 - (1 + i)^-n)/i) + F(1 + i)^-n

where:

C = F * iF = coupon payment

N = number of payments

i = market interest rate, or required yield, M = face value

P = market price of bond.

P = 1000*0.09*((1 - 1/1.11^13)/0.11) + 1000/1.11^13 = RM865.

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