On August 10, 2018, Allison purchased two bond certificates with a face value of $5000 each issued
Question:
On August 10, 2018, Allison purchased two bond certificates with a face value of $5000 each issued by Enbridge Pipeline Corp. Bonds from this company currently in the market have a semi-annual coupon rate of 6.5 percent and mature on June 11, 2031. The required market rate for a bond of this type is 4.44 percent. Calculate the cash price of the bond.
Step by Step Answer:
To calculate the cash price of the bond we can use the ...View the full answer
Contemporary Business Mathematics With Canadian Applications
ISBN: 9780135285015
12th Edition
Authors: Ali R. Hassanlou, S. A. Hummelbrunner, Kelly Halliday
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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