Principles of Managerial Finance

CHAPTER 6 Interest Rates and Bond Valuation 285

where

B 0 value of the bond at time zero

Iannualinterest paid in dollars^12

nnumber of years to maturity

Mpar value in dollars

kdrequired return on a bond

We can calculate bond value using Equation 6.7a and the appropriate financial

tables (A–2 and A–4) or by using a financial calculator.

EXAMPLE Assuming that interest on the Mills Company bond issue is paid annuallyand

that the required return is equal to the bond’s coupon interest rate, I$100, kd

10%, M$1,000, and n10 years.

The computations involved in finding the bond value are depicted graphi-

cally on the following time line.

12. The payment of annual rather than semiannual bond interest is assumed throughout the following discussion.
    This assumption simplifies the calculations involved, while maintaining the conceptual accuracy of the valuation
    procedures presented.


13. Note that a slight rounding error ($0.50) results here from the use of the table factors, which are rounded to the
    nearest thousandth.

B 0 = $1,000.50

386.00

$ 614.50

$100

20032004

$100

2005

$100

2006

$100

2007

$100

2008

$100

2009

$100

2010

$100

2011

$100

2012

$100 $1,000

2013

Time line for bond End of Year
valuation (Mills
Company’s 10%
coupon interest rate,
10-year maturity,
$1,000 par, January 1,
2004, issue paying
annual interest;
required return10%)

Table Use Substituting the values noted above into Equation 6.7a yields

B 0 $100 (PVIFA10%,10yrs) $1,000 (PVIF10%,10yrs)

$100 (6.145) $1,000 (0.386)

$614.50 $386.00 $



1



,



0



0



0



.



5



0



The bond therefore has a value of approximately $1,000.^13