The school issues a 15-year $1000 bond that pays $50 every six months. If the current...

The school issues a 15-year $1000 bond that pays $50 every six months. If the current market interest rate is 6%, what is the fair market value of the bond?

Solutions

Expert Solution

Correct Answer:

Fair market value of bond = $ 1,392

Working:

Semi-Annually		Formula Applied
Face Value of Bond	$ 1,000
Interest Semi-Annually @ 10% ($ 50 every 6 months)	$ 50	*(Face Value of Bonds Coupon rate ) /2**
Semi-Annual Effective interest Rate r = ( 6%)	0.0300	6% /2
Time Period (n) 15 years	30.00	*15 2**
Present Value of Face Value of Bond	$ 412	Face Value/(1+r%)^2n
Present Value of Interest payment	$ 980	*Interest ((1-(1+r)^-n)/r)**
Issue Price Of Bond	$ 1,392	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$ 392	Issue Price - Face Value of Bonds

End of Answer.

Thanks

ekkarill92 answered 1 year ago

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