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http://users.wfu.edu/palmitar/Law&Valuation/chapter 4/4-2-2.htm
Table of Contents
Introduction
1-Time Value
2-Risk/Return
3-Accounting
4-Securities
5-Business
6-Regulatory
Case Studies
Student Papers
Example
Suppose Play Now, Inc. issues ten-year bonds (par
$1,000) with an annual coupon of 8.6%. Similar
ten-year bonds are paying 8.0% interest. What is the
value of one of Play Now's new bonds -- that is, what
should be its price?
Answer (using tables). You can use present value and
present value annuity tables:
B0 = C/(1+i)n + M/(1+i)n
B0 = Sum (1 to n) I / (1+i)n
+ M/ (1+i)n
OR
B0 = I *[(1+i)n - 1] / [(1+i)n * i]
+ M/ (1+i)n
B0 = bond's value at time zero
I
= discount rate
Semiannual interest
Most bonds, although the coupon rate is stated as an
annual interest rate, actually pay interest semiannually.
Valuing bonds that pay interest semiannually involves
three steps:
Convert bond's annual interest (I) to semiannual
interest -- divide I by 2
Convert the years to maturity (n) to semiannual
periods -- multiply n by 2
Convert annual required return (i) to semiannual
discount rate -- divide i by 2
Example
Returning to our example, suppose Play Now issues
ten-year bonds (par $1,000) with an annual coupon rate
of 8.6% that pay interest semiannually. Similar ten-year
bonds are paying 8.0% interest. What is the value of
one of Play Now's new bonds -- that is, what should be
its price?
Answer. You can use present value and present value
annuity tables:
B0
2/6/2015 9:24 AM
2 of 2
http://users.wfu.edu/palmitar/Law&Valuation/chapter 4/4-2-2.htm
$584.37 + $456.40
$1,040.77
= discount rate
Present
value
0.5
$43
$41.35
1.0
$43
$39.76
1.5
$43
$38.23
2.0
$43
$36.76
2.5
$43
$35.34
3.0
$43
$33.98
3.5
$43
$32.68
4.0
$43
$31.42
4.5
$43
$30.21
5.0
$43
$29.05
5.5
$43
$27.93
6.0
$43
$26.86
6.5
$43
$25.82
7.0
$43
$24.83
7.5
$43
$23.88
8.0
$43
$22.96
8.5
$43
$22.08
9.0
$43
$21.23
9.5
$43
$20.41
10.0
$43
10.0
Interest Principal
$19.62
$1000
$456.39
TOTAL
$1,040.77
2/6/2015 9:24 AM