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# Valuation – corporate bond

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A $1,000 corporate bond with 10 years to maturity pays a coupon of 8% (semi-annual) and the market required rate of return is a) 7.2% and b) 10%. What is the current selling price for a) and b)? Nov 14, 2014 ### Best Answer #4 +5 Now that I have done the first one you can copy the technique and do the second one yourself. Nov 14, 2014 ### 4+0 Answers #1 0 A U.S. Government bond with a face amount of$10,000 with 8 years to maturity is yielding 3.5%. What is the current selling price?

Nov 14, 2014
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What is the value of a share of preferred stock that pays a $4.50 dividend, assume k is 10%. Nov 14, 2014 #3 +5 A$1,000 corporate bond with 10 years to maturity pays a coupon of 8% (semi-annual) and the market required rate of return is a) 7.2%

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You will be happy with at return of 7.2%.  This is less than the coupon rate of 8% so that means you will be prepared to pay more than $1000 for the bond. You will use this logic when you check the reasonableness of the answer that we will get. -------------------------------------------------------------------- r=0.08/2=0.04 every 6 months i=0.072/2=0.036 every 6 months C=1000 $$P=C+[(I-Ci)a_{n|i}]$$ Where n=20 (lots fo 6 months) and $$a_{n|i}\\\\ =\frac{1-(1+i)^{-n}}{i}\\ =\frac{1-(1+0.036)^{-20}}{0.036}\\ =\frac{1-(1.036)^{-20}}{0.036}\\$$ $$\left({\frac{\left({\mathtt{1}}{\mathtt{\,-\,}}{{\mathtt{1.036}}}^{\left(-{\mathtt{20}}\right)}\right)}{{\mathtt{0.036}}}}\right) = {\mathtt{14.084\: \!658\: \!505\: \!338\: \!905\: \!8}}$$ near enough to 14.08466 --------------------------------- $$\\P=C+[(I-Ci)a_{n|i}]\\\\ P=1000+[(40-1000*0.036)*14.08466]\\ P=1000+[(40-36)*14.08466]\\ P=1000+[4*14.08466]\\$$ $${\mathtt{1\,000}}{\mathtt{\,\small\textbf+\,}}\left[{\mathtt{4}}{\mathtt{\,\times\,}}{\mathtt{14.084\: \!66}}\right] = {\mathtt{1\,056.338\: \!64}}$$ ### The price you wil pay to get a return of 7.2% is$1056.34

this is more than \$1000 so it fits with the reasonableness check Nov 14, 2014
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Now that I have done the first one you can copy the technique and do the second one yourself. 