To summarize our earlier discussion, let’s face the last stage, in which will examine the example of the valuation of fixed rate bonds whose redemption value is equal to the nominal value.

To simplify the analysis we will use the academic example. Assume that the maturity of the bonds is 2 years. Its nominal value is equal to 150 €, while the coupon is 7% and is paid once a year. We want to determine the purchase price of the bonds, at which the rate of return on this investment will amount to 6.8%.

Step 1 - calculate the annual interest. This calculation requires only multiplying coupon by the nominal value of the bonds, so:

7% x 150 = 10.50 €

This is the coupon paid annually by the issuer to the bondholder.

Now that we have all the data, and so it is enough to calculate the value of the bonds.

Step 2. Calculate the purchase price of the bonds. Calculate the purchase price aggregating together quotients of coupons by the discount rate, but in recent times we take into account the redemption value, which in the present case is its nominal value.

In the 1: 10,50 € / (1 + 0.068) = 9,83 €

In the 2: (10.50 € 150 € +) / (1 + 0.068) 2 = 140.71 €

Therefore, the purchase price of the bonds is equal to:

9,83 € + 140.71 = 150.54 €

To obtain a specific yield of 6.8%, the purchase price of the analyzed bond is equal to 150.54 €.

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