Question

a company's bond have a par (face value of 1,000. the bond pays semiannual interest of $40 and mature in five years. how much would you pay for the bond if you required rate is 10% and how much would you pay if your required rate is 8%

Answer 1

1.Amount to be paid for a bond if the required rate is 10%:

Information provided:

Face value= future value= $1,000

Time= 5 years*2= 10 semi-annual periods

Interest rate= 10%/2= 5% per semi-annual period

Semi-annual interest payment= $40

The amount to be paid for the bond is calculated by computing the present value of the bond.

The present value of the bond is calculated by entering the below in a financial calculator:

FV= 1,000

N= 10

I/Y= 5

PMT= 40

Press the CPT key and PV to calculate the present value of the bond.

The amount obtained is $922.78.

Therefore, $922.78 should be paid for the bond if the required return is 10%.

2. Amount to be paid for a bond if the required rate is 8%:

Information provided:

Face value= future value= $1,000

Time= 5 years*2= 10 semi-annual periods

Interest rate= 8%/2= 4% per semi-annual.

Semi-annual interest payment= $40

The amount to be paid for the bond is calculated by computing the present value of the bond.

The present value of the bond is calculated by entering the below in a financial calculator:

FV= 1,000

N= 10

I/Y= 4

PMT= 40

Press the CPT key and PV to calculate the present value of the bond.

The amount obtained is $1,000.

Therefore, $1,000 should be paid for the bond if the required return is 10%.