Answer:
Value of the bond = $767.70
Explanation:
The value of the bond is the present value of the future cash receipts expected from the bond. The value is equal to present values of interest payment and the redemption value (RV).
Value of Bond = PV of interest + PV of RV
The value of bond for Potter Industries can be worked out as follows:
Step 1
Calculate the PV of Interest payment
Present value of the interest payment
PV = Interest payment × (1- (1+r)^(-n))/r
Interest payment = 6% × $1,000 = $60
PV = 60 × (1 - (1.0.086)^(-10)/0.086)
= 60 × 5.4912
= 329.47
Step 2
PV of redemption Value
PV of RV = RV × (1+r)^(-n)
= 1000 × (1.086)^(-10)
= 438.229
Step 3
Calculate Value of the bond
=329.47 + 438.229
=767.7066285
Value of the bond = $767.70
Answer:
$830.16
Explanation:
Tenor: 10 years
Coupon rate: 6% annually -> coupon received annual (PMT) = $1,000 * 6% = $60
Face value (FV): $1,000
Yield To Date (YTD): 8.6% annually
Bond’s price = present value of bond + present value of total coupon received semiannual
Present value of bond = FV/(1+ YTD) ^tenor = 1000/(1+8.6%)^10 = $438.23
Present value of total coupon received semiannual = 60/(1+8.6%)^10 +60/(1+8.6%)^9+….+ 60/(1+8.6%)^1 = $391.93
(we can use excel to calculate the PV of coupon received = PV(rate,tenor,-PMT) = PV(8.6%,10,-60) = 391.93)
⇒ Bond’s price = $438.23+ $391.93 = $830.16
