A firm issues $1000 face value bonds, with an 8.5% annual coupon. The bonds have 20...

A firm issues $1000 face value bonds, with an 8.5% annual coupon. The bonds have 20 years to maturity and are currently selling with a 7% YTM. The firm is in the 34% tax bracket. What is the price of the bond.

1158.91

845.50

Need more information

1000

Expert Solution

Value of a Bond :	Present Value of all future receipts .

Presuming Bond income is Tax Free

Face Value of Bond	$1,000
Period	20 Years
Coupon Rate	8.50%
Interest	$85
Discount Rate (YTM)	7%

To Calculate the Present Value we need to discount all the future receipts at discount rate of 7% i.e YTM

Present Value of Interest:	Sum of {( $85 / (1+.07)^1 + $85 / (1+.07)^2 …………….+ $85 / (1+.07)^20)} =
Value	$900.49

Present Value of Maturity Amount	$1000 /(1 + 0.07) ^ 20 = $258.42

Total Present Value of all Future Receipts	$900.49 + $258.42 = $1158.91

So the price of Bond will be $1158.91

jeff jeffy answered 3 months ago

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