Bond Valuation 5-minute Work-out
Prepared by Pamela Peterson Drake
Calculate the value of a bond with the following features, assuming
that interest is paid semi-annually and that the face value of
the bond is $1,000:
||Yield to maturity||Years to maturity
Solutions to Bond Valuation 5-minute Work-out
Hints and notes:
- Remember, since interest is compounded semi-annually, you
need to work in 6-month periods. First translate the bond's
characteristics into 6-month terms, then solve for the PV.
- Common sense check: if the annual yield > coupon rate,
the bond sells at a discount (problems a, b and e above); if
the annual yield < coupon rate, the bond sells at a premium
(problems c and d above).
- If you are not using a financial calculator, you need to use
the present value Table B-4 for the periodic cash flow (the interest)
and Table B-2 for the lump-sum (the face value of the bond).
- Most common error on a test for bond valuations: ignoring
the semi-annual compounding characteristic of a bond.