Question

A 14% bond matures in 14 years. Assuming the coupon is paid semiannually and the par value is $1,000, what is the value of this bond to an investor requiring a 15% rate of return? A) $828.27 B) $972.66 C) $942.13 D) $826.40

Answer 1

Information provided:

Par value= future value= $1,000

Time= 14 years*2= 28 semi-annual periods

Coupon rate= 14%/2= 7%

Coupon payment= 0.07*1,000= $70

Rate of return= 15%/2= 7.50%

The value of the bond is calculated by computing the present value.

The present value is computed by entering the below in a financial calculator:

FV= 1,000

N= 28

PMT= 70

I/Y= 7.50

Press the CPT key and PV to compute the present value.

The value obtained is 910.15.

Therefore, the value of the bond is $942.13

                                                                                                                                               

Hence, the answer is option c.

In case of any query, kindly comment on the solution.