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Humana Inc. is a for-profit American health insurance company based in Louisville, Kentucky. The company has...

Humana Inc. is a for-profit American health insurance company based in Louisville, Kentucky. The company has a series of $1,000 par value bonds outstanding. Each bond pays interest annually and carries an annual coupon rate of 8%. Some bonds are due in five (10) years while others are due in thirty (30) years. If the required rate of return on bonds is 10%, what is the current value of: (PLEASE SHOW YOU RWORK).

a) The bonds with 10 years to maturity?

b) The bonds with 30 years to maturity?

Solutions

Expert Solution

Part 1
The bonds with 10 years to maturity
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Coupon Payment 80 80 80 80 80 80 80 80
Maturity amount 1000
Total 80 80 80 80 80 80 80 1080
To be discounted at 10%
Discounting factor 0.909091 0.826446 0.751315 0.683013 0.620921 0.564474 0.513158 0.466507
Discounted cash inflow 72.72727 66.1157 60.10518 54.64108 49.67371 45.15791 41.05265 503.828
PV of Cash inflow (current value of bond) 8 years maturity 893.3015
Part 2 Years Discounted Factor
1 0.909091
2 0.826446
3 0.751315
4 0.683013
5 0.620921
6 0.564474
7 0.513158
8 0.466507
9 0.424098
10 0.385543
11 0.350494
12 0.318631
13 0.289664
14 0.263331
15 0.239392
16 0.217629
17 0.197845
18 0.179859
19 0.163508
20 0.148644
21 0.135131
22 0.122846
23 0.111678
24 0.101526
25 0.092296
26 0.083905
27 0.076278
28 0.069343
29 0.063039
(A) 30 0.057309
Total Discounting factor 9.426914
Coupon payment 80
Total Discounting coupon 754.1532
Discounted Principle (1000*A) 57.30855
PV of inflow (Current value of bond) 30 years maturity 811.4617

jeff jeffy answered 3 years ago
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