Question
In: Finance
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
Answer-
a) Current value of bond with 10 years of maturity
| YEAR | PARTICULARS |
CASH FLOW (a) |
DISCOUNTING FACTOR @ 10% (b) |
DISCOUNTED CASH FLOW (c=a*b) |
| 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=a*b) |
| 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
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