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
K_{d} = 6 percent
M = 40,000
V_{d} = 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