How to calculate the Market value of a bond - = $20,000...

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How to calculate the Market value of a bond To calculate the Market Value of a bond, please use the following: MV b = FV b (CR) [1 - 1/(1+k) n ] / k + FV b /(1+k) n Where: FV b is the Face value of the bond CR is the coupon rate Use k or the YTM if given ( use the YTM as priority ) Example 1 Coupon rate on the bond is 4% The bond yield to maturity is 10% paying interest semi-annually. The bond has a maturity date of 7 years and the face value on the bond is $1,000,000. YTM = 0.10÷2 = 0.05 Answer: MV b = $1,000,000 (0.04 ÷2) [1 - 1/(1+0.05) 14 /(0.05) + 1,000,000/(1+(0.10÷2)] 14 = $20,000 (1 – 1/1.9799) ÷ 0.05 + 1,000,000 ÷ 1.9799
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Unformatted text preview: = $20,000 (0.49490.05) + $505,076 = $20,000 (9.898) + $505,076 = $197960 + 505,076 = 703,036 All you need to do now is to put the figures in the formula. K is the cost of capital but at times you are given the Yield to Maturity (YTM). You should always use the YTM in place of K. N is the number of time periods. Now look at your problem: K or the YTM is the 4.25% N is 16 By using the formula above: [1 - 1/(1+0.0425) 16 ] / 0.0425 STEP . .1 [1 - 1/(1.0425) 16 ] / 0.0425 STEP . .2 [1 - 1/(1.9463)] / 0.0425 STEP . .3 [1 - 0.51378] / 0.0425 STEP . .4 [0.4862] / 0.0425 STEP . .5 = 11.44...
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This note was uploaded on 05/07/2009 for the course SOCIAL SCI MGMT2023 taught by Professor Peteralleyne during the Fall '09 term at University of the West Indies at Cave Hill.

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How to calculate the Market value of a bond - = $20,000...

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