Question
In: Finance
Flora Co.'s bonds, maturing in 14 years, pay 14 percent interest on a $1,000 face value....
Flora Co.'s bonds, maturing in 14 years, pay 14 percent interest on a $1,000 face value. However, interest is paid semiannually. If your required rate of return is 6 percent, what is the value of the bond? How would your answer change if the interest were paid annually?
Solutions
Expert Solution
Answer 1
Part 1
If coupon paid semiannually
Present Value = PVAF(Rate (6%/2=3%),n period(2X14=28)) + PVF(rate 3% ,28th )
PVAF =
PVF = Redemption amount X (1+R)^-n
= (1000 X 7%) X [ 1 - (1+ 3%)^-28 /3%] + 1000 X (1 + 3%)^-28
= 70 X[ 1 - 0.4370767532 /3%] + 1000 X 0.4370767532
= 70 X 18.76410823 + 437.08
= 1313.49 + 437.08
= $1750,57
Part 2
If coupon paid annually
= (1000 X 14%) X [ 1 - (1+ 6%)^-14 /6%] + 1000 X (1 + 6%)^-14
= 140 X[ 1 - 0.442301 /6%] + 1000 X 0.442301
= 140 X 9.295 + 442.30
= 1301.30 + 442.30
= $1743.60
jeff jeffy answered 1 year agoRelated Solutions
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