Question

In: Accounting

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 2 years ago
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