Question

In: Finance

Jupitar Ltd is planning to issue a bond having face value of $1000. It carries coupon...

Jupitar Ltd is planning to issue a bond having face value of $1000. It carries coupon rate of 8% pa payable annually at the end of each year. Maturity period of the bond is 5 years. Considering the market condition and rating of the company, the bond is being issued at a discounted price of $960. Your expected rate of return is 12% pa. Would you purchase the bond?

Expert Solution

Lets find the price of bond with the expected return and then we can compare the issue price and the price we derived.

Bond price formula:

Where,
C = Periodic coupon payment,
P = Face value of bond
r = Expected return
n = Years to maturity

C = 1000 * 8% = $80

Substituting the values, we get:

So as per your expected return of 12% the price should be $855.81 but the issue price is $960. So no you should not purchase the bond.

.

If you want to do it in excel refer the following.

Bond valuation
Years to maturity	5
Face value of the bond	$ 1,000.00
Coupon rate	8.00%
Coupon payment	$ 80.00
Expected rate of return	12.00%
Bond price	$ 855.81
Issue price	$ 960.00

Excel formulas:

jeff jeffy answered 2 years ago

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