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Wize University Introduction to Finance Textbook > Bond Valuation

Bond Valuation

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Bond Valuation


The coupon payment is the periodic interest payment the bondholder (investor) will receive from the issuer (borrower). This is calculated by multiplying the coupon rate by the face value of the bond and then dividing it by the number of payments per year (typically annual or semi-annual).

Step 1: Compute the periodic coupon payment



Where:
I = I\ =\ coupon payment (in dollars)
F= F=\ Face value of the bond
CR = CR\ =\ coupon rate (in %)
k = k\ =\ number of payments per year

Wize Tip
If it is not mentioned in the question, assume the bond pays coupon semi-annually (twice per year).

Step 2: Computing the Periodic Discount Rate

The discount rate used to compute the price of the bond is the yield to maturity (YTM) divided by the number of coupon payments per year.


Step 3: Compute the Present Value of the Coupon Payments and the Present Value of the Face Value

Using the Formula
Structurally a bond is nothing more than a stream of equal coupon payments (annuity) and a face value amount at the maturity date (future value)


Using the Financial Calculator



Example: Bond Valuation

Two years ago, Golden Residential Real Estate Investment Trust (“Golden”) issued coupon bond securities to raise capital. The face value of each bond is $1,000. The coupon rate is 10%; coupons are paid on an annual basis. The term was 10 years. The current market effective annual rate is 5%. What is the current price of a Golden coupon bond security?
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Example: Bond Valuation

Seattle Dairy Cooperative has issued 25-year bond securities —each of which has a face value of $1,000. The bond securities offer a coupon rate of 5% and pays coupons on a semi-annual basis. Main Street Journal reports a YTM of 4%. What is the current price of each bond security?

Practice: Bond Valuation

The WIZE Real Estate Investment Trust just issued a pure discount bond of $1,000. The bond term is 10 years. If the bond is yielding 3.5%, what is the amount that WIZE will receive upon the issuance of the pure discount bond?

Round your final answer to 2 decimal places.

Practice: Bond Valuation

Three years ago, Angus invested in a 25-year coupon bond. The face value of the bond is $1,000. The bond offers a coupon rate of 3.5% and pays interest on a monthly basis. As at present, the YTM is 3%. What is the current price of the bond?

Round your work to at least 4 decimal places and your final answer to 2 decimal places.
Extra Practice
Today is January 5th, 2022. A bond with a face value of $1,000 and a coupon rate of 12% paid semi-annually on December 31st and June 30th. If the bond is quoted at 99.421 what is the cash price of the bond?
Round your work to at least 6 decimal places and final answer to 2 decimal places.
A bond sold at a discount is expected to __________ in value as we approach maturity, assuming the yield remains constant.
A bond with a coupon rate of 10% and face value of $1000 is currently trading at a premium.
Which of the following statements is false?
What is the value of a 9 year bond with a face value of $1000, a coupon rate of 12% paid quarterly if the YTM is equal to 15%?
Round your work to at least 6 decimal places and final answer to 2 decimal places.
What is the value of a 6 year bond with a face value of $900, a coupon rate of 8% paid monthly if the YTM is equal to 10%?
Round your work to at least 6 decimal places and final answer to 2 decimal places.
What is the value of a 8 year bond with a face value of $1000, a coupon rate of 10% paid semi-annually if the YTM is equal to 12%?
Round your work to at least 6 decimal places and final answer to 2 decimal places.
What is the value of a 5 year bond with a face value of $1000, a coupon rate of 6% paid semi-annually if the YTM is equal to 5%?
Round your work to at least 6 decimal places and final answer to 2 decimal places.
Twelve years ago a fir issued a 30-year $1,000 face value bond at par. At the time, the market yield for bonds of similar risk was 5%. Today these bonds are yielding 3% and the coupon is paid semi-annually.
Round your work to at least 6 decimal places and final answer to 2 decimal places.
A 30-year bond with a face value of $1,000 and coupons payable monthly is selling at par. If the effective quarterly yield is 4.55%.
Round your work to at least 6 decimal places and final answer to 2 decimal places.
A bond has a coupon rate of 12% paid monthly and is quoted at 87.22. What is the yield to maturity if there are 7 years remaining until maturity?
Round your work to at least 6 decimal places and final answer to 2 decimal places.
The price of a 6 year semi-annual pay bond with a face value of $1,000, 8% annual coupon
and yield to maturity of 9% is closest to:
A bond sold for $1045.44 on March 14th. The bond has a face value of $1,000, coupon rate of 8% paid semi-annually on April 1st and October 1st. What was the bond quote on March 14th?
Round your work to at least 6 decimal places and final answer to 2 decimal places.
LOYC Corp is going through some financial hardships and has asked its bondholders to accept for the next 2 coupon payments to be skipped and added to the face value at maturity. The company's management has agreed to add interest to those 2 coupons an APR of 10% per year. If the bonds have 20 years remaining until maturity, have a coupon rate of 8% and are currently yielding 14%, what is the value of these bonds today?
Round your work to at least 6 decimal places and final answer to 2 decimal places.
ABC Company just issued a bond with a face value of $1,000. The coupons are paid semi-annually and the bond matures in 7 years. If the bond is worth $894.55 today and is yielding 10%, what is the coupon rate?
Round your work to at least 6 decimal places and final answer to 2 decimal places.
ABC Company just issued a bond with a face value of $1,000 and a coupon rate of 9%. The coupons are paid quarterly and the bond matures in 7 years. If the bond is worth $894.55 today, what is the yield to maturity?
ABC Company just issued a bond with a face value of $1,000 and a coupon rate of 5%. The coupons are paid quarterly and the bond matures in 12 years. If the yield is 7%, what is the value of the bond today?
ABC Company just issued a bond with a face value of $1,000 and a coupon rate of 8%. The coupons are paid semi-annually and the bond matures in 10 years. If the yield is 7%, what is the value of the bond today?