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?

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Expert Solution

Answer-

a) Current value of bond with 10 years of maturity

YEAR	PARTICULARS	CASH FLOW (a)	DISCOUNTING FACTOR @ 10% (b)	DISCOUNTED CASH FLOW *(c=ab)**
1-10	Interest	$80	6.145	$491.60
10	Maturity	$1000	0.3855	$385.50
	TOTAL			$877.10

b) Current value of bond with 30 years of maturity

YEAR	PARTICULARS	CASH FLOW (a)	DISCOUNTING FACTOR @ 10% (b)	DISCOUNTED CASH FLOW *(c=ab)**
1-30	Interest	$80	9.427	$754.16
30	Maturity	$1000	0.0573	$57.30
	TOTAL			$811.46

Note- Assuming that bonds are redeemable at par value i.e. $1000

jeff jeffy answered 1 year ago

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