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In: Economics

On January 1, 2018, Ras Alhd Corporation purchased 12% bonds dated January 1, 2018, with a...

On January 1, 2018, Ras Alhd Corporation purchased 12% bonds dated January 1, 2018, with a principal amount of OMR 120,000. The bonds mature in 2028 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. What is the price of the bonds at January 1, 2018 Select one:

a. OMR 120,000

b. OMR 138,694

c. OMR 108,000

d. OMR 101,306

Solutions

Expert Solution

Hi,

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Question:

Answer:

Principal amount = OMR 120,000

Interest rate = 12%

Coupon rate = 10%

Interest is paid semiannually on June 30 and December 31.

Coupon paid per peiod =  120,000 * 12% *1/2

= 0MR7200

Bond Price = 7200/(1+10%/2)^1 + 7200/(1+10%/2)^2 + 7200/(1+10%/2)^3 + 7200/(1+10%/2)^4 + 7200/(1+10%/2)^5 + 7200/(1+10%/2)^6 + 7200/(1+10%/2)^7 + 7200/(1+10%/2)^8 + 7200/(1+10%/2)^9 + 7200/(1+10%/2)^10 + 7200/(1+10%/2)^11 + 7200/(1+10%/2)^12 + 7200/(1+10%/2)^13 + 7200/(1+10%/2)^14 + 7200/(1+10%/2)^15 + 7200/(1+10%/2)^16 + 7200/(1+10%/2)^17 + 7200/(1+10%/2)^18 + 7200/(1+10%/2)^19 + 7200+120000/(1+10%/2)^20

= 7200/(1.05)^1 + 7200/(1.05)^2 + 7200/(1.05)^3 + 7200/(1.05)^4 + 7200/(1.05)^5 + 7200/(1.05)^6 + 7200/(1.05)^7 + 7200/(1.05)^8 + 7200/(1.05)^9 + 7200/(1.05)^10 + 7200/(1.05)^11 + 7200/(1.05)^12 + 7200/1.05)^13 + 7200/(1.05)^14 + 7200/(1.05)^15 + 7200/(1.05)^16 + 7200/(1.05)^17 + 7200/(1.05)^18 + 7200/(1.05)^19 + 127200/(1.05)^20

= 7200/1.05 + 7200/1.1025+ 7200/1.1576 + 7200/1.2155 + 7200/1.2762 + 7200/1.3400 + 7200/1.4071 + 7200/1.4774 + 7200/1.5513 + 7200/1.6288+ 7200/1.7103+ 7200/1.7958 + 7200/1.8856 + 7200/1.9799 + 7200/2.0789 + 7200/2.1828 + 7200/2.2920 + 7200/2.4066+ 7200/2.5269 + 127200/2.6532

=6857.14+6530.61+6219.76+5923.48+5641.74+5373.13+5116.90+4873.42+4641.26+4420.43+4209.78+4009.35+3818.41+3636.54+3463.37+3298.51+3141.36+2991.77+2849.34+47942.10

= OMR134958.57

Price of the bonds at January 1, 2018 = = OMR134958.57

Thank You

Rahul Sunny answered 2 years ago
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