For example, suppose ABC Company issues 5-year, $500,000, 10% bonds. Interest is paid semi-annually. The current market interest rate is 12 percent. In this example, the current market interest rate is 12 percent. The length of time until the bond expires is 5 years.
PVIF = 1/(1+. 06)10=0. 5584{\displaystyle 1/(1+. 06)^{10}=0. 5584} Present value of the principal = principal * PVIF $500,000∗0. 5584=$279,200{\displaystyle $500,000*0. 5584=$279,200}
Using the example above, the annual coupon rate is 10 percent and the annual current market interest rate is 12 percent. The number of interest payments per year is two, and there are 10 total interest payments over the life of the bond.
[(1−(1/(1+. 06)10))/. 06]=7. 3601{\displaystyle [(1-(1/(1+. 06)^{10}))/. 06]=7. 3601}
Using the above example, the present value of the principal is $279,200. The present value of the interest payments is $184,002. The bond’s face value is $500,000.
Using the above example, the bond’s market price is $279,200+$184,002=$463,202{\displaystyle $279,200+$184,002=$463,202}.
$500,000−$462,202=$36,798{\displaystyle $500,000-$462,202=$36,798}. The bond discount is $36,798.
$36,798/$500,000=. 073596{\displaystyle $36,798/$500,000=. 073596} The discount rate for the bond is 7. 36 percent.
