Question

In: Finance

Hamilton, Inc. bonds have a coupon rate of 15 percent. The interest is paid semiannually, and the bonds mature in 14 years.

Hamilton, Inc. bonds have a coupon rate of 15 percent. The interest is paid semiannually, and the bonds mature in 14 years. Their par value is $1,000. If your required rate of return is 14 percent, what is the value of the bond? What is the value if the interest is paid annually?

Expert Solution

Coupon rate of the bond = 15%

Tenure of the Bond = 14 years

Par value of the Bond = $1000

Interest for semi annual period = par value X Interest rate X 0.5

= 1000 x 15% x 0.5

= $75

Required rate of return = 14%

Total semi annual payments =14 x 2 =28

Required rate of return for 6 months = 14/2 = 7%

Formula for present value cash flows = Cash flow / (1+R)

^{PV Cash flow =} ? C_n / (1+R)ⁿ

PV annuity factor for = ? 1 / (1+.07)²⁸

^{= 12.14}

^{PV value of coupon payments = 12.14 x 75}

^{= $ 910.28}

PV value of Bond payable after 14 years = 1000 x 1/(1+.14)¹⁴

^{= $ 150.4}

^{PV value of Bond = $ 150.4 + $ 910.28}

^{= $ 1060.69}

^{If Interest is payable annually then the present value
factor for 14 years = 6.00}

Interest payable per annum = 1000 x 15% = 150

PV value of coupon payment = 150 x 6 = $ 900

PV value Bond repayable after 14 years = $ 150.4 ( Calculated above)

PV value of Bond is = 150.4 + 900

= $ 1050.4

jeff jeffy answered 2 years ago

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