Question

(Bond valuation)  

Enterprise, Inc. bonds have an annual coupon rate of 11 percent. The interest is paid semiannually and the bonds mature in 9 years. Their par value is $1000. If the market's required yield to maturity on a comparable-risk bond is 16 percent, what is the value of the bond? What is its value if the interest is paid annually? 

a. The value of the Enterprise bonds if the interest is paid semiannually is $ nothing. (Round to the nearest cent.)

Answer 1

a. Semiannual interest = $1,000 * 0.11 * 6/12 = $55

Current bond price = $55(PVIFA 8%,18) + $1,000(PVIF 8%,18)

Current bond price = ($55 * 9.37188713542) + ($1,000 * 0.25024902906)

Current bond price = $765.70

b. Interest = $1,000 * 0.11 = $110

Current bond price = $110(PVIFA 16%,9) + $1,000(PVIF 16%,9)

Current bond price = ($110 * 4.60654387489) + ($1,000 * 0.26295297998)

Current bond price = $769.67