CFA Level 1 Bond Calculation

Bond Coupon and Principal Payments

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What is the value of coupon and principal payments on a 10-year bond with coupon payments of $50 every six months (for a total of 20 payments), a principal payment of $8,000 in 10 years, and a required rate of return of 8%?

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A. B. C. D. E.

C

The value of coupon payments can be thought of as the value of an annuity with 20 periods, and with a rate of return of 4% (half of 8%) for each period. Using appendix C in the book by Reilly & Brown, the present value of the coupons is equal to 50 x 13.59 = $679.50. Using the same appendix, the present value of the principal payment is equal to 8000 x 0.4632 = $3705.60. Note that many textbooks recommend using the six-month interest rate and doubling the number of yearly periods in making this calculation. Using 4% for 20 periods, the value of the final payment is $8,000/(1.04^20) = $3,651.

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