The bond has a face value of $1,000 with a coupon rate of 4.5% paid semi-annually. Also, the bond will mature in next 10 years with a required return of 6%. Bond’s are issued to raise funds for the company. The important characteristic of a bond is that it has a maturity value which is the value the bondholders will get at the end of the maturity period. Also, some bonds carry coupon rate which means the bondholders will get a regular interest cash flow on that bond. The yield to maturity (YTM) of the bond is the required rate of return investors expect on holding the bond till the maturity period. Bond Price is calculated as Bond Price ( V d ) = ∑ I N T N ( 1 + r d ) N + M ( 1 + r d ) N o r , V d = I N T ( 1 − 1 ( 1 + r d ) N r d ) + M ( 1 ( 1 + r d ) N ) Where, INT = coupon payments made N = number of periods M = Maturity or Face value rd = rate of return Vd = Value of the bond

Question

Lightning Electric’s outstanding bond has a $1000 maturity value and a 4.5 percent coupon rate of interest (paid semiannually). The bond, which was issued five years ago, mature in 10 years. If investors require a return equal to 6 percent to invest in similar bonds, what is the current market value of Lightning’s bond?

Answer 1

Question

Chapter 6, Problem 4PROB

Summary Introduction

The bond has a face value of $1,000 with a coupon rate of 4.5% paid semi-annually. Also, the bond will mature in next 10 years with a required return of 6%.

Bond’s are issued to raise funds for the company. The important characteristic of a bond is that it has a maturity value which is the value the bondholders will get at the end of the maturity period. Also, some bonds carry coupon rate which means the bondholders will get a regular interest cash flow on that bond.

The yield to maturity (YTM) of the bond is the required rate of return investors expect on holding the bond till the maturity period.

Bond Price is calculated as

Bond Price(Vd) = ∑INTN(1+rd)N+M(1+rd)Nor,Vd=INT(1−1(1+rd)Nrd)+M(1(1+rd)N)

Where,

INT = coupon payments made

N = number of periods

M = Maturity or Face value

rd = rate of return

Vd = Value of the bond

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