Bond Valuation Exercises

1. Colby & Company bonds pay semiannual interest of RM50. They mature in 15 years and
have a par value of RM1,000. The market rate of interest is 8%. The market value of Colby
bonds is (round to the nearest Ringgit).
BV= CP [(1-(1+I/2)-2n/(I/2)+(PMT/(1+I/2)2n]
BV= RM50 [(1-(1+0.08/2)-2x15/(0.08/2) + (RM1,000/(1+0.08/2)2x15
BV= RM50 (0.6917/0.04)+(RM1,000/3.2434)
BV= RM864.60+RM308.32
BV= RM1,172.92

2. Caldwell, Inc. issued a 30-year, RM1,000 par value bonds to the public. The bonds carry a
10.85% coupon rate and pay interest semiannually. It is now 12 years later. The current
market rate of interest on the Caldwell bonds is 8.45%. What is the current market price
(intrinsic value) of the bonds? (round to the nearest Ringgit).
BV= CP [(1-(1+I/2)-2n/(I/2)+(PMT/(1+I/2)2n]
BV= RM54.25 [(1-(1+0.0845/2)-2x12/(0.0845/2) + (RM1,000/(1+0.0845/2)2x12
BV= RM54.25 (0.6296/0.04225)+(RM1,000/2.70)
BV= RM808.42+RM370.40
BV= RM1,178.82

3. What is the value of a bond that matures in three years, has an annual coupon payment of
$110, and a par value of RM1,000? Assume a required rate of return of 11%, and round your
answer to the nearest Ringgit.
BV= CR [(1-(1+I)-n/I)+(PMT/(1+I)]
BV= RM110 [(1-(1+0.11)-3/0.11)+(RM1,000/(1+0.11)3]
BV= RM110 (2.4437)+(RM1,000/1.3676)
BV= RM268.81+RM731.19
BV= RM1,000

4. Terminator Bug Company bonds have a 14% coupon rate. Interest is paid annually. The
bonds have a par value of $1,000 and will mature 10 years from now. Compute the value of
Terminator bonds if investors' required rate of return is 12%.
BV= CR [(1-(1+I)-n/I)+(PMT/(1+I)]
BV= RM140 [(1-(1+0.12)-10/0.12)+(RM1,000/(1+0.12)10]
BV= RM140 (5.6502)+(RM1,000/3.106)
BV= RM791.03+RM321.97
BV= RM1,113

5. When a bond's coupon rate is higher than the required rate of return, the bond will sell at a
_premium price______.

6. When a bond's coupon rate is lower than the required rate of return, the bond will see at a
_discount price______ .

7. When a bond's coupon rate is the same as the required rate of return, the bond will see at a
_par value______ .
8. Calculate the value of a bond that is expected to mature in 13 years with a RM1,000 face
value. The interest coupon rate is 8%, and the required rate of return is 10%. Interest is paid
annually.
BV= CR [(1-(1+I)-n/I)+(PMT/(1+I)]
BV= RM80 [(1-(1+0.10)-13/0.10)+(RM1,000/(1+0.10)13]
BV= RM80 (7.1034)+(RM1,000/3.4523)
BV= RM568.27+RM289.66
BV= RM857.93

9. Colby & Company bonds pay semiannual interest of RM50. They mature in 15 years and
have a par value of RM1,000. The market rate of interest is 8%. The market value of Colby
bonds is (round to the nearest Ringgit).

Par value RM1,000

Coupon rate 10%
Years to maturity 6
Market rate 8%
Interest paid semiannually

BV= CP [(1-(1+I/2)-2n/(I/2)+(PMT/(1+I/2)2n]
BV= RM50 [(1-(1+0.08/2)-2x6/(0.08/2) + (RM1,000/(1+0.08/2)2x6
BV= RM50 (0.3754/0.04)+(RM1,000/1.6010)
BV= RM469.25+RM624.60
BV= RM1,093.85