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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

BOND VALUATION You are considering a 10-year, $1,000 par value bond. Its coupon rate is 8%, and interest is paid semiannually. If you require an “effective” annual interest rate (not a nominal rate) of 7.1225%, how much should you be willing to pay for the bond?

Summary Introduction

To identify: Present value of the bond.

Bond Valuation:

Bond valuation refers to the evaluation of bonds value at any point of time which can be used for decision making. Valuation of bond is done for comparison and analysis.

Explanation

Given,

Interest rate is 8% or 0.08 (0.04 semi-annually).

Effective annual interest rate is 7.1225%.

Par value of bond is $1,000.

Maturity is after 10 years of bond.

Formula to calculate nominal rate,

Nominalrate=((1+Effectiverate)1k1)×k

Where,

  • k is the number of compounds in a year.

Substitute 0.071225 for effective rate and 2 for number of compounds,

Nominalrate=((1+0.071225)121)×2=((1.071225)121)×2=(1.0351)×2=0

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