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.