Download Market Value of Bond Example

Market Value of Bond Example
•
For a twenty-year $10,000 bond with a coupon rate of 5%, what is the
market value when the interest rate is 5.5% and ten years remaining?
• The market value of the bond is simply the present value of
the uniform series of remaining annuity amounts (5% of
$10,000, which is $500) plus the present value of the
principal repayment, using the market interest rate for the
discount rate.
10,500
$500
0
1
Pbond
$500
2
3
4
5
6 … 10
0
n
• The principal repayment of the original amount at the end of
the term is a future value, which is why we have to calculate
its present value.
Pbond = 10,000(P|F,5.5%,10) + 500(P|A,5.5%,10)
= $3,768.81 + 5,854.31 = $9,623.12
© MG Lipsett, 2010
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ENGM 401 & 620 – Fundamentals of Engineering Finance,
Lecture 22: Interest Calculations (3)
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