Example of valuation of bonds and debentures, Finance Basics

Example of Valuation of Bonds and Debentures

K is contemplating purchasing a 3 year bond worth 40,000/= carrying a nominal coupon rate of interest of 10 percent.  K necessary rate of return is 6 percent.

What must he be willing to pay currently to purchase the bond if it matures at par?

Solution

Int  =       10 percent x 40,000 = 4,000 p.a.

n    =        3 yrs

Kd  =        6 percent

M   =        40,000

Vd  = 4,000 / (1.06)1 + 4,000 / (1.06)2 +4,000 / (1.06)3 +4,000 / (1.06)3      

      = 4,000 x PVAF6%,3 + 40,000 x PVIF6%,3 = (40,000 x 2.673) + (40,000 x 0.840)

      = 44,292

Posted Date: 1/31/2013 2:16:58 AM | Location : United States







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