Fundamentals of Financial Manageme...
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Fundamentals of Financial Manageme...
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?
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.
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,
Where,
Substitute 0.071225 for effective rate and 2 for number of compounds,
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