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Alton Corp. purchased ten $ 1000 7​% bonds of Galvan Corporation when the market rate of...

Alton Corp. purchased ten $ 1000 7​% bonds of Galvan Corporation when the market rate of interest was 14​%. Interest is paid​ semiannually, and the bonds will mature in five year.

Alton paid

$

on the bond investment.

I need the Present value of the bonds?

Solutions

Expert Solution

Present Value of the Bond

The Present Value of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the bond = $1,000

Semi-annual Coupon Amount = $35 [$1,000 x 7% x ½]

Semi-annual Yield to Maturity of the Bond = 7.00% [14.00% x ½]

Maturity Period = 10 Years [5 Years x 2]

Therefore, the Value of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $35[PVIFA 7.00%, 10 Years] + $1,000[PVIF 7.00%, 10 Years]

= [$35 x 7.02358] + [$1,000 x 0.50835]

= $245.82 + $508.35

= $754.17

“Therefore, the Present Value of the Bond will be $754.17”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.  

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.  

ekkarill92 answered 6 months ago
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