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Bond Valuation Calculation Exercise—Using ST 61, pg. 264
We discount a bond’s interest stream and its principal repayment (as those are the only
two types of cash flows coming to us as investors) when doing a “second opinion,”
“theoretical price,” or value estimate for a bond.
Info given in problem about Lahey’s bonds:
$1,000 par value (which is always the FV)
8% coupon rate > $80 (moving decimal one place to the right), which will be PMT
because it occurs each year.
This assumes annual compounding.
Bond has 12 years until maturity, from today, so 12 is N.
a.
(1) the required return is 7% a year – this is I/YR, the discount rate.
[ ] C ALL
1 [ ] P/YR
80 [PMT]
1000 [FV]
12 [N]
7 [I/YR]
Press [PV] > 1,079,43 or $1,079.43
This is what we’d be willing to pay for the bond today.
Is this a discount or premium price?
Why a premium price resulting here?
Because the discount rate < the coupon rate.
a. (3) 10% discount rate:
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This note was uploaded on 02/29/2012 for the course BUS 332 taught by Professor Johnzietlow during the Spring '12 term at Malone University.
 Spring '12
 JohnZietlow
 Finance, Interest, Valuation

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