# Bond Valuation Essay

1434 Words Dec 17th, 2015 6 Pages
BondBond Valuation
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
Discount = \$72.10

= 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

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