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


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