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5.1

Bond Valuation

Bond Valuation with Annual payments Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%.What is the current market price of these bonds?

VB = INT*r*[1 - (1+rd)-n]/i + M*(1+rd)-n

INT = par value

M= maturity value

r = coupon rate per coupon payment period

rd= effective interest rate per coupon payment period

n = number of coupon payments remaining

INT = 1000.

And, since we are not given the maturity value, we can assume that it is the same as the par value.

Therefore, M = 1000.

r = .08i = .09n = 12

Market price of the bonds

* 1000*.08 * (1 - 1.09-12)/.09 + 1000*1.09-12Market price of the bonds = $928.39

5-2

Yield to Maturity for Annual payments

Wilson Wonder’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a$1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity?

Par value =$1,000

Coupon rate =10%

Time to maturity =12 years

Price of the bond = $(-850)

100+1000-850/12/1000+850/2

* 112.5/928

* = .12475 or 12.475%

5-6

Maturity Risk Premium

The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security?

r = r* + IP + MRP

=> 3 + 3 + MRP

=> 6 + MRP

=> 6.3 – 6

=> 0.3%

5.7

Bond Valuation with Semiannual payments

Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds?

We need to find the price of a bond, given the following data 

N = 16; I/YR = 8.5/2 = 4.25; PMT = 50; FV = 1000.

From excel calculations

PV = $1,085.80

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