| End of quarter |
Cash Flow
(8.2/4=2.05% of par value per
quarter plus the par value at maturity)
|
PV of Cash Flow
(12.5/4=3.125% discounting)
|
| 1 |
20.5 |
20.5/(1+3.125/100)1=19.88 |
| 2 |
20.5 |
20.5/(1+3.125/100)2=19.28 |
| 3 |
20.5 |
20.5/(1+3.125/100)3=18.69 |
| 4 |
20.5 |
20.5/(1+3.125/100)4=18.13 |
| 5 |
20.5 |
20.5/(1+3.125/100)5=17.58 |
| 6 |
20.5 |
20.5/(1+3.125/100)6=17.04 |
| 7 |
20.5 |
20.5/(1+3.125/100)7=16.53 |
| 8 |
20.5 |
20.5/(1+3.125/100)8=16.03 |
| 9 |
20.5 |
20.5/(1+3.125/100)9=15.54 |
| 10 |
20.5 |
20.5/(1+3.125/100)10=15.07 |
| 11 |
20.5 |
20.5/(1+3.125/100)11=14.61 |
| 12 |
20.5 |
20.5/(1+3.125/100)12=14.17 |
| 13 |
20.5 |
20.5/(1+3.125/100)13=13.74 |
| 14 |
20.5 |
20.5/(1+3.125/100)14=13.32 |
| 15 |
20.5 |
20.5/(1+3.125/100)15=12.92 |
| 16 |
20.5 + 1000 |
20.5/(1+3.125/100)16+1000/(1+3.125/100)16=12.53+611.19=623.72 |
Therefore the fair present value of the bond is the sum of
present values of all the cash flows
=$
(19.88+19.28+18.69+18.13+17.58+17.04+16.53+16.03+15.54+15.07+14.61+14.17+13.74+13.32+12.92+623.72)
=$ 866.25
Hence the fair price considering a 12.5% required rate
of return, compounded quarterly
