Question

In: Finance

Borland, Inc. issues 25-year semi-annual bonds that have a facevalue of $1,000 and a coupon...

Borland, Inc. issues 25-year semi-annual bonds that have a face value of $1,000 and a coupon rate of 7.5%. The current market price for the bonds is $950.00.   If your required rate of return is 8.5%, what is the value of one of these bonds to you?(Your answer should be with +/- $0.02 of the following answers.)

  • $977.95

  • $978.09

  • $897.03

  • $950

Solutions

Expert Solution

Price of Bond is nothing but PV of Cash flows from it.

Particulars Amount
Coupon Amount $         37.50
Maturity Value $    1,000.00
Disc Rate 4.250%
Starting 1
Ending on 50

Coupon Amount = 1000 * 7.5 % *6/12 = 37.5

Discount rate = 8.5% *6/12 = 4.25%

period Cash Flow PVF/ PVAF @4.25 % Disc CF
1 - 50 $      37.50                     20.5931 $    772.24
50 $ 1,000.00                       0.1248 $    124.79
Bond Price $    897.03
PVAF = Sum [ PVF(r%, n) ]
PVF = 1 / ( 1 + r)^n
Where r is int rate per Period
Where n is No. of Periods

3rd Option has to be selected


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