# Bond Valuation Essay example

Bond

Bond is a long term contract under which a borrower agrees to make payments of interest and principal, on specific dates, to the holders of the bond Key characteristics: VB = value of a bond/bond price M = par or maturity value of the bond; it is the stated face value of the bond and this is amount that must be paid off at maturity and it is often equal to $ 1.000 INT = coupon payment or dollars of interest paid each year; (Coupon rate x Par value) rk = coupon interest rate; (coupon payment / par value) rd = the bond's required rate of the return; that is the market rate of interest for that type of bond; it is also called the yield N = number of years before the bond matures; maturity date is a date on which the par

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= 100 ∙

The bond is selling at a price equal to its par value.

= 100 ∙

1 1 − 0.10 0.10 ∙ (1 + 0.10)

+ 1,000 ∙

or

= 100 ∙ 7.606 + 1,000 ∙ 0.239 = 1,000 + 1,000 (1 + 0.10) = 1,000

Example: (Tool Kit 4.3.) A bond matures in 6 years has a par value of $ 1.000, an annual coupon payment of $ 80 and a market interest rate of 9%. What is its price? M (or FV)=$ 1,000 rd=9% INT= $ 80 rk=8% N=6 VB=? = 80 ∙

The bond is selling at a price below its par value, meaning that the required rate of return (rd) coupon rate (rk).It is called a discount bond. 2

+ 1,000