Question

In: Accounting

KIC plans to issue $4m of bonds, coupon rate 7% and 30 yrs to maturity. Current...

KIC plans to issue $4m of bonds, coupon rate 7% and 30 yrs to maturity. Current market interest 8%. In one year, interest rate on the bonds will be either 8% or 6% with equal probability. If bonds are noncallable what is price of bonds today? Assume par $1000 and Semi-Annual payments.

Solutions

Expert Solution

Suppose the bond is paying annual coupon

Price of the bond could be calculated using below formula.

P = C* [{1 - (1 + YTM) ^ -n}/ (YTM)] + [F/ (1 + YTM) ^ -n]

Where,

                Face value = $1000

                Coupon rate = 0.0725

                YTM or Required rate = 0.08

                Time to maturity (n) = 30 years

                Annual coupon C = $72.5

Let's put all the values in the formula to find the bond current value

P = 72.5* [{1 - (1 + 0.08) ^ -30}/ (0.08)] + [1000/ (1 + 0.08) ^30]

P = 72.5* [{1 - (1.08) ^ -30}/ (0.08)] + [1000/ (1.08) ^30]

P = 72.5* [{1 - 0.09938}/ 0.08] + [1000/ 10.06266]

P = 72.5* [0.90062/ 0.08] + [99.3773]

P = 72.5* 11.25775 + 99.3773

P = 816.186875 + 99.3773

P = 915.564175

So price of the bond is $915.56


Related Solutions

KIC, Inc., plans to issue $7 million of bonds with a coupon rate of 7 percent...
KIC, Inc., plans to issue $7 million of bonds with a coupon rate of 7 percent and 20 years to maturity. The current market interest rates on these bonds are 9 percent. In one year, the interest rate on the bonds will be either 8 percent or 4 percent with equal probability. Assume investors are risk-neutral.    a. If the bonds are noncallable, what is the price of the bonds today? Assume a par value of $1,000 and semiannual payments....
KIC, Inc., plans to issue $4 million of bonds with a coupon rate of 6 percent...
KIC, Inc., plans to issue $4 million of bonds with a coupon rate of 6 percent and 20 years to maturity. The current market interest rates on these bonds are 11 percent. In one year, the interest rate on the bonds will be either 10 percent or 4 percent with equal probability. Assume investors are risk-neutral.    a. If the bonds are noncallable, what is the price of the bonds today? Assume a par value of $1,000 and semiannual payments....
Assets, Inc., plans to issue $5 million of bonds with a coupon rate of 7 percent,...
Assets, Inc., plans to issue $5 million of bonds with a coupon rate of 7 percent, a par value of $1,000, semiannual coupons, and 30 years to maturity. The current market interest rate on these bonds is 6 percent. In one year, the interest rate on the bonds will be either 9 percent or 5 percent with equal probability. Assume investors are risk-neutral. a.If the bonds are noncallable, what is the price of the bonds today? b.If the bonds are...
Jamestown, Inc., plans to issue $4 million of bonds with a coupon rate of 7 percent,...
Jamestown, Inc., plans to issue $4 million of bonds with a coupon rate of 7 percent, a par value of $1,000, semiannual coupons, and 10 years to maturity. The current market interest rate on these bonds is 6 percent. In one year, the interest rate on the bonds will be either 12 percent or 6 percent with equal probability. Assume investors are risk-neutral. If the bonds are noncallable, what is the price of the bonds today?
Assets, Inc., plans to issue $6 million of bonds with a coupon rate of 7 percent,...
Assets, Inc., plans to issue $6 million of bonds with a coupon rate of 7 percent, a par value of $1,000, semiannual coupons, and 10 years to maturity. The current market interest rate on these bonds is 8 percent. In one year, the interest rate on the bonds will be either 8 percent or 4 percent with equal probability. Assume investors are risk-neutral. . If the bonds are noncallable, what is the price of the bonds today?
Williams Company plans to issue bonds with a face value of $605,500 and a coupon rate...
Williams Company plans to issue bonds with a face value of $605,500 and a coupon rate of 4 percent. The bonds will mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds are sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.)   Determine the issuance price...
Trew Company plans to issue bonds with a face value of $908,500 and a coupon rate...
Trew Company plans to issue bonds with a face value of $908,500 and a coupon rate of 6 percent. The bonds will mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds are sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answers to nearest whole dollar amount.)     Determine...
ABC plc plans to issue bonds with a face value of £10,000 each, coupon rate of...
ABC plc plans to issue bonds with a face value of £10,000 each, coupon rate of 4 percent, paid annually, and 10 years to maturity. The current market interest rate on similar bonds is 4 percent. In one years’ time, the long-term interest rate for this type of bond is predicted to be either 5 percent or 3 percent with equal probability. Assume investors are risk-neutral. a. If the bonds are non-callable, what is the price of the bonds today,...
Assets, Inc., plans to issue $8 million of bonds with a coupon rate of 6 percent,...
Assets, Inc., plans to issue $8 million of bonds with a coupon rate of 6 percent, a par value of $1,000, semiannual coupons, and 30 years to maturity. The current market interest rate on these bonds is 10 percent. In one year, the interest rate on the bonds will be either 10 percent or 4 percent with equal probability. Assume investors are risk-neutral. a. If the bonds are noncallable, what is the price of the bonds today? (Do not round...
XYZ Corporation plans to issue perpetual bonds (par value = $1,000) with a coupon rate of...
XYZ Corporation plans to issue perpetual bonds (par value = $1,000) with a coupon rate of 8% paid annually. The current market interest rates on these bonds are 7%. In one year, the interest rate on the bonds will be either 10% or 4% with equal probability. a. If the bonds are noncallable, what is the price of the bonds today? b. If the bonds are callable one year from now at $1,100, what is the price of the bonds...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT