Question

In: Finance

Crown Enterprises recently issued a bond that has a $1,000 face or par value. This bond...

Crown Enterprises recently issued a bond that has a $1,000 face or par value. This bond has a coupon interest rate of 6% and has a life of 8 years. If interest is paid annually on this bond, calculate the market value today at t = 0 of this bond, assuming a required return for this bond of 5%.

Now, assume that the required return on this bond increases to 8%. Assume also that the bond pays interest semi-annually, rather than annually. Given this new information, calculate the market value of this bond today at t = 0.

Expert Solution

a

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k] + Par value/(1 + YTM)^N

k=1

K =8

Bond Price =∑ [(6*1000/100)/(1 + 5/100)^k] + 1000/(1 + 5/100)^8

k=1

Bond Price = 1064.63

b

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2

k=1

K =8x2

Bond Price =∑ [(6*1000/200)/(1 + 8/200)^k] + 1000/(1 + 8/200)^8x2

k=1

Bond Price = 883.48

jeff jeffy answered 1 year ago

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