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Seven years ago (NPC) issued twenty year 8.0% semi annual coupon bonds each with a $1,000...

Seven years ago (NPC) issued twenty year 8.0% semi annual coupon bonds each with a $1,000 face value. Since then, interest rates have generally fallen and the yield to maturity on the NPC bonds is now 3.9%. Give this information, what is the price today for a NPC bond?

Do not use a chart or computer for this. No financial calculator. Step by step.

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Expert Solution

Price of the NPC Bond

Price of a Bond is the aggregate amount of Present Value of the Coupon payments and the Present Value of its Face Value

Face Value of the bond = $1,000

Semi-annual Coupon Amount = $40 [$1,000 x 8% x ½]

Semi-annual Yield to Maturity = 1.95% [3.90% x ½]

Maturity Period = 26 Years [(20 Years – 7 Years) x 2]

Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $40[PVIFA 1.95%, 26 Years] + $1,000[PVIF 1.95%, 26 Years]

= [$40 x 0.24379] + [$1,000 x 0.60525]

= $809.75 + $605.25

= $1,415.00

“Therefore, the Price today for the NPC Bond would be $1,415.00”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

jeff jeffy answered 1 year ago
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