Question

Consider Fulton Manufacturing Company's 5^1/2 percent bonds that mature on April 15, Year 15. Assume that the interest on these bonds is paid and compounded annually. Determine the value of a $1,000 denomination Fulton bond as of April 15, Year 1, to an investor who holds the bond until maturity and has the following required rate of return. Use Table II and Table IVto answer the questions. Round your answers to the nearest cent.

1. 7 percent
   $   
2. 9 percent
   $   
3. 11 percent
   $   

What would be the value of the Fulton bonds at an 8 percent required rate of return if the interest were paid and compounded semiannually?
$   

Answer 1

Since No tables are given in question, the presey value factors are taken from tablea available online. (Even if we calculate using a calculator, they would remain same)

Bond face value =$1000

Coupon amount = $1,000 x 5 1/2 % = $55

Time till maturity = 14 years (year 15 - year 1)

If required rate is 7%

= 55 x PVIFA(7%,14) + 1,000 x PVIF(7%,14)

= 55 x 8.745468 + 1,000 x 0.38782

= $868.82

If required rate is 9%

= 55 x PVIFA(9%,14) + 1,000 x PVIF(9%,14)

= 55 x 7.78615 + 1,000 x 0.29925

= $727.49

If required rate is 11%

= 55 x PVIFA(11%,14) + 1,000 x PVIF(11%,14)

= 55 x 6.981865 + 1,000 x 0.23199

= $616

If the interest payment and compounding is done semi annually :

Semi annual interest payment = 1,000 x 5 1/2% x 6/12 = $27.5

Number of semi annual payments = 14 years x 2 = 28 periods

Required rate is 8% annual (that means 4% semi annual)

Value = 27.5 x PVIFA(4%,28) + 1,000 x PVIF(4%,28)

= 27.5 x 16.66306 + 1,000 x 0.33348

= $791.71

Note :

PVIFA = Present value interest factor annuity

PVIF = Present value interest factor