Chapter 5: How to Value Bonds and Stocks
5.1
The present value of any pure discount bond is its face value discounted back to the present.
a.
PV
= F / (1+r)
10
= $1,000 / (1.05)
10
=
$613.91
b.
PV
= $1,000 / (1.10)
10
=
$385.54
c.
PV
= $1,000 / (1.15)
10
=
$247.19
5.2
First, find the amount of the semiannual coupon payment.
Semiannual Coupon Payment
= Annual Coupon Payment / 2
=
(
0
.
0
8
×
$1,000) / 2
=
$
4
0
a.
Since the stated annual interest rate is compounded semiannually, simply divide this rate
by two in order to calculate the semiannual interest rate.
Semiannual Interest Rate = 0.08 / 2
=
0
.
0
4
The bond has 40 coupon payments (=20 years
×
2 payments per year).
Apply the annuity
formula to calculate the PV of the 40 coupon payments.
In addition, the $1,000 payment
at maturity must be discounted back 40 periods.
P
= C A
T
r
+ F / (1+r)
40
= $40 A
40
0.04
+ $1,000 / (1.04)
40
=
$1,000
The price of the bond is $1,000.
Notice that whenever the coupon rate and the
market rate are the same, the bond is priced at par.
That is, its market value is
equal to its face value.
b.
Semiannual Interest Rate = 0.10 / 2
=
0
.
0
5
P
= $40 A
40
0.05
+ $1,000 / (1.05)
40
=
$828.41
The price of the bond is $828.41.
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View Full Document5.3
Since the payments occur semiannually, discount them at the semiannual interest rate.
Convert the
effective annual yield (EAY) to a semiannual interest rate.
Semiannual Interest Rate = (1+EAY)
1 / T
– 1
=
(
1
.
1
2
)
1/2
– 1
= 0.0583
a.
Calculate the semiannual coupon payment.
Semiannual Coupon Payment
= Annual Coupon Payment / 2
=
(
0
.
0
8
×
$1,000) / 2
=
$
4
0
Apply the annuity formula to calculate the PV of the 40 coupon payments (=20 years
×
2
payments per year).
In addition, the $1,000 payment at maturity must be discounted back
40 periods. The appropriate discount rate is the semiannual interest rate.
P
= C A
T
r
+ F / (1+r)
40
= $40 A
40
0.0583
+ $1,000 / (1.0583)
40
=
$718.65
The price of the bond is $718.65
.
b.
Calculate the semiannual coupon payment.
Semiannual Coupon Payment
= (0.10
×
$1,000) / 2
=
$
5
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 Spring '08
 Lim
 Time Value Of Money, Net Present Value, Dividend yield, Price per share

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