UNIVERSITY OF THE IMMACULATE CONCEPTION

Bonifacio St., Davao City

MASTERS IN BUSINESS ADMINISTRATION

Financial Management

NINIO BIONG MANIALAG VINCENT RAY BORON, CPA, MBA

Student Professor

Problem 7-1. BOND VALUATION. Madsen Motors’s bonds have 23 years remaining to maturity. Interest
is paid annually; they have a $1,000 par value; the coupon interest rate is 9%; and the yield to maturity
is 11%. What is the bond’s current market price?

Given:
Par value of bond (FV) = $1,000
Interest / coupon payments (INT) = $90 (1,000 x 9% = $90)
Market rate or yield to maturity (r) = 11%
Years to maturity (t) = 23 years
Number of compounding periods per year (n) = Annually

Required: Bond market price (VB)

Bond price formula:

VB = INT 1- (1+r/n) – (t) (n) + FV

r/n (1+r/n) (t) (n)

Where:

VB = price of bond
FV = par or face value of bond (or future value because this is the final payment made when the bond
matures in the future
INT = interest / coupon payments
r = market interest rate or yield to maturity (YTM)
n = number of compounding periods per year
t = number of years to maturity

Solve for price bond:

VB = INT 1- (1+r/n) – (t) (n) + FV

r/n (1+r/n) (t) (n)

= $90 1- (1+0.11/1) – (23) (1) + $1,0000

0.11/1 (1+0.11/1) (23) (1)

= $90 1- 0.0906925 + $1,000

0.11 11.0262672
= $90 0.9093075 + $90.69
0.11

= $743.98 + $90.69

VB = $834.67

Problem 7-3. BOND VALUATION. Nesmith Corporation’s outstanding bonds have a $1,000 par value, an
8% semiannual coupon, 14 years to maturity, and an 11% YTM. What is the bond’s price?

Given:
Par value of bond (FV) = $1,000
Interest / coupon payments (INT) = $40 (1,000 x 0.08/2 = $40)
Market rate or yield to maturity (r) = 11%
Years to maturity (t) = 14 years
Number of compounding periods per year (n) = Annually

Solve for price bond:

VB = INT 1- (1+r/n) – (t) (n) + FV

r/n (1+r/n) (t) (n)

= $40 1- (1+0.11/2) – (14) (1) + $1,0000

0.11/2 (1+0.11/2) (14) (1)

= $40 1- 0.2233218 + $1,000

0.055 4.4778431

= $40 0.7766782 + $223.32

0.055

= $564.86 + $223.32

VB = $788.18

Problem 6-7. BOND VALUATION. An investor has two bonds in her portfolio, Bond C and Bond Z. Each
bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 8.2%. Bond C pays an
11.5% annual coupon, while Bond Z is a zero-coupon bond.
a. Assuming that the yield to maturity of each bond remains at 8.2% over the next 4 years,
calculate the price of the bonds at each of the following years to maturity:

Given:
Par value of bond (FV) = $1,000
Interest / coupon payments (INT) = $115
Market rate or yield to maturity (r) = 8.2%
Years to maturity (t) = 4,3,2,1, 0 years
Number of compounding periods per year (n) = Annually

Required: Bond price 4,3,2,1, 0 years to maturity

4 years to maturity:

VB = INT 1- (1+r/n) – (t) (n) + FV

r/n (1+r/n) (t) (n)

= $115 1- (1+0.082/1) – (4) (1) + $1,0000

0.082/1 (1+0.082/1) (4) (1)

= $115 1- 0.7296103 + $1,000

0.082 1.3705947

= $115 0.2703897 + $729.61

0.082

= $379.21 + $729.61

VB = $1,108.82 Bond C

VB = $729.61 Bond Z
For bond Z, simply remove the first term/ expression. We have $729.61

3 years to maturity:

VB = INT 1- (1+r/n) – (t) (n) + FV

r/n (1+r/n) (t) (n)

= $115 1- (1+0.082/1) – (3) (1) + $1,0000

0.082/1 (1+0.082/1) (3) (1)

= $115 1- 0.7894383 + $1,000

0.082 1.2667234

= $115 0.2105617 + $789.44

0.082

= $295.3 + $789.44

VB = $1,084.74 Bond C

VB = $789.44 Bond Z
For bond Z, simply remove the first term/ expression. We have $789.44
2 years to maturity:

VB = INT 1- (1+r/n) – (t) (n) + FV

r/n (1+r/n) (t) (n)

= $115 1- (1+0.082/1) – (2) (1) + $1,0000

0.082/1 (1+0.082/1) (2) (1)

= $115 1- 0.1458277 + $1,000

0.082 1.170724

= $115 0.1458277 + $854.17

0.082

= $204.51 + $854.17

VB = $1,058.68 Bond C

VB = $854.17 Bond Z
For bond Z, simply remove the first term/ expression. We have $854.17

1 year to maturity:

VB = INT 1- (1+r/n) – (t) (n) + FV

r/n (1+r/n) (t) (n)

= $115 1- (1+0.082/1) – (1) (1) + $1,0000

0.082/1 (1+0.082/1) (1) (1)

= $115 1- 0.9242144 + $1,000

0.082 1.082

= $115 0.0757856 + $924.21

0.082

= $106.28 + $924.21

VB = $1,030.49 Bond C

VB = $924.21 Bond Z
For bond Z, simply remove the first term/ expression. We have $924.21

No need to compute for year 0 value, since this represents the final payment for the bond - the par
value of the bond of $1,000 (for both C and Z).
Plot the bond prices:
Price
Years to Maturity
Bond C Bond Z
4 $1,108.82 $729.61
3 $1,084.74 $789.44
2 $1,058.69 $854.17
1 $1,030.49 $924.21
0 $1,000.00 $1,000.00