Bionca buys a 14-year bond wit
Bionca buys a 14-year bond with semiannual coupons of $27 eachand a redemption value of $1310. She bought the bond to yield 6%compounded semiannually. Determine the book value of this bond 8years after issue of the bond.
Answer:
Book value of bond = Present value of futurecash-flows
Reqired rate of return = 6% p.a. (this will be3% [6%/2] as the coupon is received semiannually.
Time = 6 years [ this will be 12 years for 3%as the coupon is paid semi-annually)
As the bond is issued for14 years and 8 years has alreadypassed. This remaining life will be 6 years.
| Time (n) | Year | Coupon | Redemption | Discounting factor @3%k=1/(1+3%)^n | Presentvalue |
| A | B | C | (A + B) XC | ||
| 1 | 8.5 | 27 | – | 0.97 | 26.21 |
| 2 | 9.0 | 27 | – | 0.94 | 25.45 |
| 3 | 9.5 | 27 | – | 0.92 | 24.71 |
| 4 | 10.0 | 27 | – | 0.89 | 23.99 |
| 5 | 10.5 | 27 | – | 0.86 | 23.29 |
| 6 | 11.0 | 27 | – | 0.84 | 22.61 |
| 7 | 11.5 | 27 | – | 0.81 | 21.95 |
| 8 | 12.0 | 27 | – | 0.79 | 21.31 |
| 9 | 12.5 | 27 | – | 0.77 | 20.69 |
| 10 | 13.0 | 27 | – | 0.74 | 20.09 |
| 11 | 13.5 | 27 | – | 0.72 | 19.51 |
| 12 | 14.0 | 27 | – | 0.70 | 18.94 |
| 12 | 14.0 | – | 1,310 | 0.70 | 918.81 |
| Price ofbond | 1,187.57 |
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