Market Value Of A Bond - University of Alberta

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

$500

Pbond

0 1 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)

? MG Lipsett, 2010

= $3,768.81 + 5,854.31 = $9,623.12

ENGM 401 & 620 ? Fundamentals of Engineering Finance,

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Lecture 22: Interest Calculations (3)

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