Question

A bond, whose par value is ₹1000, bears a coupon value of 12 percent and had a maturity period of 3 years. The required rate of return on the bond is 10 percent. What is the value of the bond?
Please give full solution

Answer 1

Answer:

Annual interest payable = 1,000 * 12% = 120

Principal repayment at the end of 3 years = Rs. 1,000

The value of the bond

= 120 (PVIFA 10%, 3 yrs) + Rs. 1,000 (PVIF 10%, 3 yrs)

= 120 (2.487)+1,000 (0.751)

= 298.44 + 751

= Rs. 1049.44 (Ans)

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Answer 2

If a bond's coupon rate is more than its YTM, then the bond is selling at a premium. If a bond's coupon rate is equal to its YTM, then the bond is selling at par. Formula for yield to maturity: Yield to maturity(YTM) = [(Face value/Bond price)1/Time period ]-1.