Question

Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 10%. What is the price of the bonds? Round your answer to the nearest cent.

Answer 1

	CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY
	Step 1 : Calculation of Annual Coupon Payments
	Par value of the bond issued is   =			$1,000
	Annual Coupon %			10.00%
	Annual Coupon Amount			$100.00
	Semi Annual Coupon Amount			$50.00
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 8 years
	Interest is paid semi annyally so total period = 8 Years * 2 = 16 Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 8%
	Bonds interest is paid semi annualy means so discounting factor = 8 % /2= 4 %
	PVF = 1 / Discount rate = 1/ 1.04
	Result of above will again divide by 1.04 , repeat this lat period
	Period	Interest	Amount (In Million)	PVF @ 4%	PresentValue
	1	Interest	$50.00	0.9615	$48.08
	2	Interest	$50.00	0.9246	$46.23
	3	Interest	$50.00	0.8890	$44.45
	4	Interest	$50.00	0.8548	$42.74
	5	Interest	$50.00	0.8219	$41.10
	6	Interest	$50.00	0.7903	$39.52
	7	Interest	$50.00	0.7599	$38.00
	8	Interest	$50.00	0.7307	$36.53
	9	Interest	$50.00	0.7026	$35.13
	10	Interest	$50.00	0.6756	$33.78
	11	Interest	$50.00	0.6496	$32.48
	12	Interest	$50.00	0.6246	$31.23
	13	Interest	$50.00	0.6006	$30.03
	14	Interest	$50.00	0.5775	$28.87
	15	Interest	$50.00	0.5553	$27.76
	16	Interest	$50.00	0.5339	$26.70
	16	Bond Principal Value	$1,000.00	0.5339	$533.91
		Total			$1,116.52
		Current Bonds Price =			$1,116.52
	Answer = 1 =Issue price of the bond=			$1,116.52