a 20 year bond pays on a face value of $1,000. If similar bonds are currently yielding 9%. What is the Market value of the bond?
capital rationing assumes?
To calculate the market value of a bond, you need to consider the present value of its future cash flows. In this case, the bond is a 20-year bond that pays $1,000 on its face value. The current yield on similar bonds is 9%.
To find the market value, we can use the formula for present value of a bond:
Market Value = (Coupon Payment / (1 + Yield)^1) + (Coupon Payment / (1 + Yield)^2) + ... + (Coupon Payment + Face Value / (1 + Yield)^n)
Where:
- Coupon Payment is the annual interest paid by the bond (in this case, it is the face value of $1,000),
- Yield is the current market yield (9% expressed as 0.09),
- n is the number of years until maturity (20 years in this case).
Let's calculate the market value:
Coupon Payment = $1,000
Yield = 0.09
n = 20
Market Value = ($1,000 / (1 + 0.09)^1) + ($1,000 / (1 + 0.09)^2) + ... + ($1,000 / (1 + 0.09)^20)
To simplify the calculation, you can use a financial calculator, spreadsheet software (such as Microsoft Excel), or an online present value calculator. These tools will help you calculate the sum of the present values more efficiently.
By plugging the values into the formula or using a financial calculator, the market value of the bond will be determined.