A Sheraton Hotel bond has a par value of $1,000, and has a coupon rate of...

A Sheraton Hotel bond has a par value of $1,000, and has a coupon rate of 7.25%. The coupon in paid monthly. The investor's rate of return is 9%. The bond will mature in 12 years, and the investor is planning to keep this bond until maturity. Based on this information, the value of this bond is equal to:

A. $817.85

B. $871.85

C. $858.71

D. $885.71

Expert Solution

Answer: B. $871.85

Coupon amount = $1,000* 7.25% = $72.5
Interest rate = 9%
Interest rate monthly = 9/12 = 0.75%
Time = 12 years, therefore, 12*12 = 144 months

Bond value = Coupon amount PVAF (i%, n) + Redemption amount PVIF (i%, n)
Bond Value = 72.5 PVAF (0.75, 144) + 1,000 PVIF (0.75, 144)
Bond Value = $871.85

jeff jeffy answered 2 years ago

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