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On January 1, 2018, Rare Bird Ltd. purchased 15% bonds dated January 1, 2018, with a...

On January 1, 2018, Rare Bird Ltd. purchased 15% bonds dated January 1, 2018, with a face amount of $28 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 14%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required: Determine the price of the bonds at January 1, 2018.

Solutions

Expert Solution

Particulars Cash flow Discount factor Discounted cash flow
Interest payments-Annuity (7%,20 periods) 2,100,000.0 10.5940 22,247,429.92
Principle payments -Present value (7%,20 periods) 28,000,000 0.2584 7,235,732.08
A Bond price       29,483,161.99
Face value       28,000,000.00
Premium/(Discount)         1,483,161.99
Interest amount:
Face value 28,000,000
Coupon/stated Rate of interest 15.00%
Frequency of payment(once in) 6 months
B Interest amount 28000000*0.15*6/12= 2100000
Present value calculation:
yield to maturity/Effective rate 14.00%
Effective interest per period(i) 0.14*6/12= 7.000%
Number of periods:
Ref Particulars Amount
a Number of interest payments in a year                                     2
b Years to maturiy                                10.0
c=a*b Number of periods                                   20

Bond price is  29,483,161.99

ekkarill92 answered 3 years ago
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