## 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:

 Problem Coupon rate Yield to maturity Years to maturity Bond value a 8% 10% 6 b 4% 6% 3 c 6% 4% 20 d 6.25% 6% 10 e 4% 8% 5

## Solutions to Bond Valuation 5-minute Work-out

 Problem CF r t FV Bond value a \$40 5% 12 \$1,000 \$911.37 b \$20 3% 6 \$1,000 \$945.83 c \$30 2% 40 \$1,000 \$1,273.55 d \$31.25 3% 20 \$1,000 \$1,018.60 e \$20 4% 10 \$1,000 \$837.78

Hints and notes:

1. 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.
2. 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).
3. 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).
4. Most common error on a test for bond valuations: ignoring the semi-annual compounding characteristic of a bond.