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March 26, 2017

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A comp. has issued a bond with the following characteristics: Principal=1000, Time to maturity=20yrs. Coupon Rate=8%, compounded semiannually with semiannual payments. Calculate the value of this bond if the stated interest rate, compounded semiannually is 6%

My attempt: 1000(.08)/2 * (1-1/1.06^20) + (1000/1.06^20) = 40(11.4699) + 311.80 = 770.60

  • Finance (Check Answer plz) - ,

    I get a different answer.
    An excel spreadsheet is very helpful for these types of problems. (However, I am aware that finance instructors are into using look-up tables rather that calculating everything out). I presume you can use EXCEL to calculate.

    Anyway, find V where:
    V = C/(1+i) + C/(1+i)^2 + ... C/(1+i)^n + P/(1+i)^n

    Where V is the bond value, C is the coupon payment, i is the interest rate, n is the number of payments, and P is the Principal.
    Since payments are semiannual, I presume that C=$80/2=$40 and i=.06/2 = .03, n=40, and P=1000
    I get V=1236.40

  • Finance (Check Answer plz) - ,

    Thanks, I know now where I went wrong. I need to ask something else.

    Comp. Q has just paid a dividend of $1.40 per share. Its dividend is expected to grow at 5% per year perpetually. If the required return is 10%, what is the value of a share in Company Q?

    I think I use formula p0 = Div/r-g but I don't know where the required rate of return comes into play.
    I know:
    g=.05
    r=
    Retention Ratio=90%
    Req. rate of return=10%
    growth rate in Div. of (.9*.1)=9%

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