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Chapter 9 - Bond Valuation (Exercises)

The document provides examples of bond valuation calculations using the bond valuation formula. It defines key terms like par value, coupon rate, market rate, and calculates the bond value in different scenarios when the coupon rate is higher, lower, or equal to the market rate. The examples show calculating bond values when interest is paid annually or semiannually, for bonds with various maturity periods and coupon/market rates.

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199 views2 pages

Chapter 9 - Bond Valuation (Exercises)

The document provides examples of bond valuation calculations using the bond valuation formula. It defines key terms like par value, coupon rate, market rate, and calculates the bond value in different scenarios when the coupon rate is higher, lower, or equal to the market rate. The examples show calculating bond values when interest is paid annually or semiannually, for bonds with various maturity periods and coupon/market rates.

Uploaded by

wst
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Bond Valuation Exercises

1. Colby & Company bonds pay semiannual interest of RM50. They mature in 15 years and
have a par value of RM1,000. The market rate of interest is 8%. The market value of Colby
bonds is (round to the nearest Ringgit).
BV= CP [(1-(1+I/2)-2n/(I/2)+(PMT/(1+I/2)2n]
BV= RM50 [(1-(1+0.08/2)-2x15/(0.08/2) + (RM1,000/(1+0.08/2)2x15
BV= RM50 (0.6917/0.04)+(RM1,000/3.2434)
BV= RM864.60+RM308.32
BV= RM1,172.92

2. Caldwell, Inc. issued a 30-year, RM1,000 par value bonds to the public. The bonds carry a
10.85% coupon rate and pay interest semiannually. It is now 12 years later. The current
market rate of interest on the Caldwell bonds is 8.45%. What is the current market price
(intrinsic value) of the bonds? (round to the nearest Ringgit).
BV= CP [(1-(1+I/2)-2n/(I/2)+(PMT/(1+I/2)2n]
BV= RM54.25 [(1-(1+0.0845/2)-2x12/(0.0845/2) + (RM1,000/(1+0.0845/2)2x12
BV= RM54.25 (0.6296/0.04225)+(RM1,000/2.70)
BV= RM808.42+RM370.40
BV= RM1,178.82

3. What is the value of a bond that matures in three years, has an annual coupon payment of
$110, and a par value of RM1,000? Assume a required rate of return of 11%, and round your
answer to the nearest Ringgit.
BV= CR [(1-(1+I)-n/I)+(PMT/(1+I)]
BV= RM110 [(1-(1+0.11)-3/0.11)+(RM1,000/(1+0.11)3]
BV= RM110 (2.4437)+(RM1,000/1.3676)
BV= RM268.81+RM731.19
BV= RM1,000

4. Terminator Bug Company bonds have a 14% coupon rate. Interest is paid annually. The
bonds have a par value of $1,000 and will mature 10 years from now. Compute the value of
Terminator bonds if investors' required rate of return is 12%.
BV= CR [(1-(1+I)-n/I)+(PMT/(1+I)]
BV= RM140 [(1-(1+0.12)-10/0.12)+(RM1,000/(1+0.12)10]
BV= RM140 (5.6502)+(RM1,000/3.106)
BV= RM791.03+RM321.97
BV= RM1,113

5. When a bond's coupon rate is higher than the required rate of return, the bond will sell at a
_premium price______.

6. When a bond's coupon rate is lower than the required rate of return, the bond will see at a
_discount price______ .

7. When a bond's coupon rate is the same as the required rate of return, the bond will see at a
_par value______ .
8. Calculate the value of a bond that is expected to mature in 13 years with a RM1,000 face
value. The interest coupon rate is 8%, and the required rate of return is 10%. Interest is paid
annually.
BV= CR [(1-(1+I)-n/I)+(PMT/(1+I)]
BV= RM80 [(1-(1+0.10)-13/0.10)+(RM1,000/(1+0.10)13]
BV= RM80 (7.1034)+(RM1,000/3.4523)
BV= RM568.27+RM289.66
BV= RM857.93

9. Colby & Company bonds pay semiannual interest of RM50. They mature in 15 years and
have a par value of RM1,000. The market rate of interest is 8%. The market value of Colby
bonds is (round to the nearest Ringgit).

Par value RM1,000


Coupon rate 10%
Years to maturity 6
Market rate 8%
Interest paid semiannually

BV= CP [(1-(1+I/2)-2n/(I/2)+(PMT/(1+I/2)2n]
BV= RM50 [(1-(1+0.08/2)-2x6/(0.08/2) + (RM1,000/(1+0.08/2)2x6
BV= RM50 (0.3754/0.04)+(RM1,000/1.6010)
BV= RM469.25+RM624.60
BV= RM1,093.85

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