# Bond Valuation Essay

Valuing the cash flows

Chapter 7

(1) coupon payment (interest payment)

= (coupon rate * principal)

Bonds, Bond Valuation, and Interest Rates

usually paid every 6 months

(2) maturity value

= principal or par value

= $1000

Example (coupon rate = rd)

Five year corp. bond pay coupons at 10% rate, market rate (discount rate) (required rate of return) is 10%

Example (coupon rate = rd)

Define Terms

C

rd = 10%

0

1

2

3

4

5

├───────┼───────┼───────┼───────┼───────┤

P0

$100

$100

$100

$100

$100

$1,000

F n rd

P0

= coupon payment = coupon rate x $1000

= 10% x $1,000 = $100

= face amount or maturity value = $1000

= payments to maturity = 5

= required rate of return

*…show more content…*

= PV = $927.90

3

Problem

A Harrah’s Entertainment Inc 9 7/8 percent bond matures in ten years. Assume that the interest on these bonds is paid and compounded annually. Determine the value of a $1,000 denomination Harrah’s bond as of today if the required rate of return is 7 percent.

Solution

PMT = 9.875% x $1,000 = 98.75

FV = 1000

I/Y = 7%

N

= 10

PV = $1,201.93

Problem

A Harrah’s Entertainment Inc 9 7/8 percent bond matures in ten years. Assume that the interest on these bonds is paid and compounded annually. Determine the value of a $1,000 denomination Harrah’s bond as of today if the required rate of return is 9 percent.

Solution

PMT = 9.875% x $1,000 = 98.75

FV = 1000

I/Y = 9%

N

= 10

PV = $1,056.15

4

Problem

A Harrah’s Entertainment Inc 9 7/8 percent bond matures in ten years. Assume that the interest on these bonds is paid and compounded annually. Determine the value of a $1,000 denomination Harrah’s bond as of today if the required rate of return is 11 percent.

Solution

PMT = 9.875% x $1,000 = 98.75

FV = 1000

I/Y = 11%

N

= 10

PV = $933.75

Problem

Problem (cont)

Assume you purchased a Stations Casino,

Inc. bond one year ago for $829.73 when the market rate of interest was 10%. This bond matures in 19 years and is contracted to pay a annual coupons at the rate of 8%. If