If you know the par value of bonds, the contract rate, and the market rate, how do you compute the bonds’ price?

Solutions

Expert Solution

Step-by-Step Solution

Step 1: Definition of bonds

The bonds are a type of the long-term debt source for the companies. These are issued by the companies to raise large amount of money. On the bonds the companies has to pay interest in the regular intervals.

Step 2: Determination of Bond Price

The issue price of the bonds is calculated by determining the present value of the bonds. In the calculation of the present value, the semi-annual compounding period is used by the company for cash payments and discounts. The present value of the bonds determined by using the present value factor. To calculate the bond price we multiply the PV factor with the par value of bonds. After this we add the interest payment to calculate the final amount of the bond price.

In this when the contract price of the bonds is less than the market price it means that bonds are issued at a discount.

If the contract price is greater than the market rate it means the bonds are issued at a premium.

When the contract rate and the market rate are equal it means bonds are issued at par.

It is calculated by using the present value of bonds.

Sahil Dangi answered 1 year ago

Next > < Previous

Related Solutions

Compute the market price (Vb) of the following $1,000 par value bonds with 10-year maturity: (15)...

Compute the market price (Vb) of the following $1,000 par value bonds with 10-year maturity: (15) 8% coupon (interest rate) paid semi-annually? Assume the yield to maturity of 12%. 6% coupon (interest rate) paid semi-annually? Assume the yield to maturity of 12%. 8% coupon (interest rate) paid semi-annually? Assume the yield to maturity of 6%. Based on your answers, comment on the relationship (what happens to one variable when the other goes up/down) of (a) price with yield to maturity...

The bonds have a $40,000 par value and an annual contract rate of 10%, and they...

The bonds have a $40,000 par value and an annual contract rate of 10%, and they mature in 10 years. Interest is paid semiannually..What is the bonds issue price with market rates of 8%, 10% and 12%

how do you compute a selling price if you know the cost and the required gross...

how do you compute a selling price if you know the cost and the required gross margin? this is cost accounting question i want a detailed solution by any random theory of any calculation

Compute the selling price of 10%, 10-year bonds with a par value of $360,000 and semiannual...

Compute the selling price of 10%, 10-year bonds with a par value of $360,000 and semiannual interest payments. The annual market rate for these bonds is 12%. Use present value Table B.1 and Table B.3 in Appendix B. (Round all table values to 4 decimal places, and use the rounded table values in calculations.) cash flow table value present value $360,000 par (maturity) date 18,000 interest payment Price of Bond

Compute the selling price of 9.00%, 15-year bonds with a par value of $270,000 and semiannual...

Compute the selling price of 9.00%, 15-year bonds with a par value of $270,000 and semiannual interest payments. The annual market rate for these bonds is 6.00%. Use present value Table B.1 and Table B.3 in Appendix B. (Round all table values to 4 decimal places, and use the rounded table values in calculations. Round your other final answers to nearest whole dollar amount.) cash flow table value present value $270,000 par (maturity) value $12,150 interest payment Price of...

You are trying to price two bonds that have the same maturity and par value but...

You are trying to price two bonds that have the same maturity and par value but different coupon rates and different required rates of return. Both bonds mature in 3 years and have par values of $1000. One bond has a coupon rate of 7% and a required rate of return of 7%. The other bond has a coupon rate of 5% and a required rate of return of 5%. What is the absolute value of the difference between the...

2. A company issued 10%, 5-year bonds with a par value of $600,000. The market rate...

2. A company issued 10%, 5-year bonds with a par value of $600,000. The market rate when the bonds were issued was 8%. The company received $613,600 cash for the bonds. What is the semi-annual Bond Interest Expense?

1/ A company issued 5-year, 9.50% bonds with a par value of $109,000. The market rate...

1/ A company issued 5-year, 9.50% bonds with a par value of $109,000. The market rate when the bonds were issued was 9.00%. The company received $111,294 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is: Multiple Choice $5,177.50. $10,355.00. $5,008.23. $9,953.54. $2,588.75. 2/ On January 1 of Year 1, Congo Express Airways issued $3,650,000 of 8% bonds that pay interest semiannually on January 1 and July...

Fingen's 15-year, $1,000 par value bonds pay 11 percent interest annually. The market price of the bonds...

Fingen's 15-year, $1,000 par value bonds pay 11 percent interest annually. The market price of the bonds is $920 and the market's required yield to maturity on a comparable-risk bond is 14 percent. a. Compute the bond's yield to maturity. b. Determine the value of the bond to you, given your required rate of return. c. Should you purchase the bond?

how do we value money market securities, bonds and stocks? Do you think that this model...

how do we value money market securities, bonds and stocks? Do you think that this model (technique) makes sense? Limit your answer to 400 words. We have devoted several chapters to this CLO. First, we focused on money market securities. Remember that money markets are short-term instruments, i.e. securities with a maturity of a maximum a year. These securities are Treasury bills, commercial paper, federal funds, repurchase agreements, negotiable certificates of deposit, banker’s acceptances, and Eurodollars. We also examined capital...

Subjects