Bond and Share Valuation Solutions

Solution 1
Bond 1 Bond 2
Par value $2000 $2000
Coupon rate 10% ; semi annually 8% ; monthly
I 11% 7%
YTM 10Years 10Years
Interest pmt 10%*2000*1/2=100 8%*2000*1/12=13.33
N 10*2=20 10*12=120
J 11%/2=5.5% 7%/12=0.5833%
a) John’s calculation for both bonds are wrong. He did not covert the coupon and interest rates into
their respective compounding intervals for both bonds.
b)
Bond 1
Interest pmt -10%*2000*1/2=100
n -10*2=20
j -11%/2=5.5%
PV = 100*((1-(1+5.5%)-20)/5.5%)+2000*(1+11%)-10 = 1899.41
Bond 2
Interest pmt -8%*2000*1/12=13.33
n -10*12=120
j -7%/12=0.583%
PV = 13.33*((1-(1+0.583%)-120)/0.583%)+2000*(1+7%)-10 = 2165.05
Bond 1 Bond 2
Present Value $1,899.41 $2,165.05
c)
i) Reasons the present value drops below par value
A higher discount rate will result into a lower bond value. Furthermore, if the same rate is higher than
the bond’s coupon rate, then its value will be less than the bond’s par value.