Investigating the principle that all bonds are priced to give the same total yield which is the current market rate of interest. REQUIRED: Create your own bond – i.e. the par value may be kept at 1000, but decide your own coupon rate, maturity period and current market rate of interest. Now compute your total yield which should consist of Current Yield plus Capital Gain/Loss Yield and find out if it equates the market rate of interest that you selected.
Investigating the principle that all
Bonds: Bonds are a debt instrument on which interest is paid. They can be issued at a discount/par or premium.
Present Value of Bonds Payable = Present Value of all interest payments + Present Value of principle returned
Present Value of Bonds Payable = PVIFA (r%, n) * Interest payment + PVIF (r%, n) * principal value
where,
PVIFA = Present Value of Annuity
r = Rate of interest (market)
n = Number of years
PVIF = Present Value
Note:
To get PVIFA (4.5%,10) we look for 4.5% and in that column, we search for 10 in the row and we take the intersection value.
Let our bond be of par value of 1000
Coupon rate: 9% paid annually
Maturity: 6 years
Current Market Rate: 7%
Price of the bond:
Hence, Value of Bond = $1,095.33
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