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EXAMPLE

For the data given above and assuming interest is paid annually, compute the value of the bond

Solution

1

The bond value is equal to the par value. As a general proposition, when the required return is equal to the coupon rate, the bond value equals the par value. However, the market value of the bond is rarely equal to its par value. Several external factors over which bondholders or issuers have no control tend to affect bond values. We discuss below.the impact of two factors on bond values, namely, (i) required return and (ii) time to maturity.

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