Course Name: Event Driven Trading Strategies, Section No: 10, Unit No: 1, Unit type: Document
For a bond that cost 850$, with bi-anually coupons, the face value won't be:
Face Value = Present Value + (Coupons + Annual Coupon Payment)
Face Value = 850 + (80 * 2) = 1010
Please, let me know if something's wrong. I don't find coherence in the data of this unit.
Hello Daniel,
It seems like there might be some confusion in the calculation. Let's address your doubt:
The formula you've used to calculate the face value is incorrect for this scenario. The face value of a bond is not determined by adding the present value (purchase price) to the sum of coupons and annual coupon payments.
The face value of a bond is the amount that will be repaid to the bondholder at maturity, regardless of the purchase price or coupon payments. In the document provided, the face value of the bond is stated as $1040. This means that at maturity, the investor will receive $1040, regardless of the purchase price or coupon payments.
So, the correct calculation for the face value of the bond in this scenario would be simply $1040, as stated in the document. The calculation provided by you is a useful tool for determining the face value of a bond in certain scenarios where you have all the necessary information. However, it's important to remember that the face value of a bond is ultimately determined by the issuer and is fixed throughout the life of the bond.
Let me know if you need further clarification or if there's anything else we can assist you with!
Thank you, it's more clear now. However I have one last question more:
If the face value is 1040$ at the maturity (fixed by the issuer) and the investor receives 80$ bi-anually, at the maturity of the bond the investor would receive a total of 80*5+1040=1440$?
Hello Daniel,
Your calculation is not completely correct and the total amount received would be $1480 at the maturity. Let me explain how!
Throughout the bond's term, there are a total of 11 coupon payments of $40 each (Please refer to the graph of Bond Investment Cash Flow in the document). These payments are made semi-annually.
So, the total amount received from coupon payments over the bond's term would be:
Total coupon payments = (Number of semi-annual payments * Coupon payment per period)
Total coupon payments = (11 * $40) = $440
Note: In the sixth year, there is only one additional semi-annual coupon payment of $40.
At maturity, the investor would receive the face value of the bond, which is $1040. This final payment represents the repayment of the principal amount invested in the bond.
Therefore, the total amount received by the investor over the bond's term would be the sum of the coupon payments and the face value payment at maturity:
Total amount received = Total coupon payments + Face value at maturity
Total amount received = $440 + $1040 = $1480
So, the total amount the investor would receive over the bond's term would be $1480.
You might be wondering why there are 11 coupon payments instead of 12. It should be noted that, the final payment at maturity is not counted among the coupon payments. Instead, it's considered a separate payment representing the repayment of the principal amount invested in the bond.
So, in this convention, there are 11 coupon payments throughout the bond's term, and the 12th payment is the face value payment made at maturity.
If you have any further questions or need clarification, feel free to ask!