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Example of Valuation of Bonds and Debentures
K is contemplating purchasing a 3 year bond worth 40,000/= carrying a nominal coupon rate of interest of 10 percent. K necessary rate of return is 6 percent.
What must he be willing to pay currently to purchase the bond if it matures at par?
Solution
Int = 10 percent x 40,000 = 4,000 p.a.
n = 3 yrs
Kd = 6 percent
M = 40,000
Vd = 4,000 / (1.06)1 + 4,000 / (1.06)2 +4,000 / (1.06)3 +4,000 / (1.06)3
= 4,000 x PVAF6%,3 + 40,000 x PVIF6%,3 = (40,000 x 2.673) + (40,000 x 0.840)
= 44,292
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