A firm issues a $10 m bond with a 6% coupon rate, 4-year maturity, and annual interest payments when market interest rates are 7%. Can anyone tell me if the market rate changes to 8%, the BV of the bonds at the end of the 1st period will be: 1. $$9,484,581 or 2. $9,737,959 ? This is a question from Schweser, I used my BAII: If N=4, I/Y=8, PMT = $600,000 and FV=$10 M the new PV is: 9,337,574.63, 1st yr interest: 747,005.97, then isn’t it suppose to be: $9,484,581? I’m confused by the answer i was provided, please help me, thanks.

The change in the interest rate on the market has nothing to do with the book value of debt. The book value, the interest expense, the amortization of loss (if the bond is issued at discount) is always calculated using the interest rate at the time of bond issue. To answer your question, you only need to calculate the book value using the 7% rate, with a maturity of 3 years (from the text it is understood this is an annual pay bond), on a bond of $10mil face value with a coupon of 6%: N=3 I/Y=7 PMT=600,000 FV=10,000,000 CPT PV=9,737,568.4 That’s close to the second option.

Thank you