Bond Valuation 5minute Workout
Prepared by Pamela Peterson Drake
Calculate the value of a bond with the following features, assuming
that interest is paid semiannually 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 5minute Workout
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:
 Remember, since interest is compounded semiannually, you
need to work in 6month periods. First translate the bond's
characteristics into 6month 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 B4 for the periodic cash flow (the interest)
and Table B2 for the lumpsum (the face value of the bond).
 Most common error on a test for bond valuations: ignoring
the semiannual compounding characteristic of a bond.