Question

In: Accounting

Market Price of a Bond The company intends to issue 20-year bonds with a face value...

Market Price of a Bond

The company intends to issue 20-year bonds with a face value of $1,000. The bonds carry a coupon rate of 9%, and interest is paid semiannually. On the issue date, the market interest rate for bonds issued by companies with similar risk is 12% compounded semiannually.

Compute the market price of one bond on the date of issue.

Click here to access the PV table and the PV of an ordinary annuity table to use with this problem. Round your answer to the nearest cent.

$  

Solutions

Expert Solution

Price of bond is the present value of cash flows from bond.
Present Value of coupon interest $     677.08
Present value of Par Value $       97.22
Present Value of cash flows $     774.31
So, price of bond is $ 774.31
Working:
# 1 Semi annnual coupon interest = Face Value * Semi annual coupon rate
= 1000*4.5%
= $       45.00
# 2 Present value of annuity of 1 = (1-(1+i)^-n)/i Where,
= (1-(1+0.06)^-40)/0.06 i 6%
= 15.046297 n 40
# 3 Present value of 1 = (1+i)^-n
= (1+0.06)^-40
= 0.0972222
# 4 Present Value of coupon = Coupon Interest * Present Value of annuity of 1
= $       45.00 * 15.0463
= $     677.08
# 5 Present value of face value = Face Value * Present value of 1
= $ 1,000.00 * 0.097222
= $       97.22

ekkarill92 answered 11 months ago
Next > < Previous

Related Solutions

J&J has an outstanding issue of 20- year maturity bond with face value of $1,000 and...
J&J has an outstanding issue of 20- year maturity bond with face value of $1,000 and a coupon of 8%, paying coupon interest semi-annually. If the market price of this bond is $1200, what is the rate of return investors are demanding on this bond?
Issue Price The following terms relate to independent bond issues: 460 bonds; $1,000 face value; 8%...
Issue Price The following terms relate to independent bond issues: 460 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest payments 460 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest payments 820 bonds; $1,000 face value; 8% stated rate; 10 years; semiannual interest payments 1,840 bonds; $500 face value; 12% stated rate; 15 years; semiannual interest payments Use the appropriate present value table: PV of $1 and PV of Annuity of $1 Required: Assuming the...
Issue Price The following terms relate to independent bond issues: 460 bonds; $1,000 face value; 8%...
Issue Price The following terms relate to independent bond issues: 460 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest payments 460 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest payments 890 bonds; $1,000 face value; 8% stated rate; 10 years; semiannual interest payments 1,830 bonds; $500 face value; 12% stated rate; 15 years; semiannual interest payments Use the appropriate present value table: PV of $1 and PV of Annuity of $1 Required: Assuming the...
Issue Price The following terms relate to independent bond issues: 500 bonds; $1,000 face value; 8%...
Issue Price The following terms relate to independent bond issues: 500 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest payments 500 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest payments 800 bonds; $1,000 face value; 8% stated rate; 10 years; semiannual interest payments 2,000 bonds; $500 face value; 12% stated rate; 15 years; semiannual interest payments Required: Assuming the market rate of interest is 10%, calculate the selling price for each bond issue. Refer...
Issue Price The following terms relate to independent bond issues: 420 bonds; $1,000 face value; 8%...
Issue Price The following terms relate to independent bond issues: 420 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest payments 420 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest payments 820 bonds; $1,000 face value; 8% stated rate; 10 years; semiannual interest payments 2,190 bonds; $500 face value; 12% stated rate; 15 years; semiannual interest payments Use the appropriate present value table: PV of $1 and PV of Annuity of $1 Required: Assuming the...
Issue Price The following terms relate to independent bond issues: 650 bonds; $1,000 face value; 8%...
Issue Price The following terms relate to independent bond issues: 650 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest payments 650 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest payments 760 bonds; $1,000 face value; 8% stated rate; 10 years; semiannual interest payments 2,060 bonds; $500 face value; 12% stated rate; 15 years; semiannual interest payments Use the appropriate present value table: PV of $1 and PV of Annuity of $1 Required: Assuming the...
Issue Price The following terms relate to independent bond issues: 640 bonds; $1,000 face value; 8%...
Issue Price The following terms relate to independent bond issues: 640 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest payments 640 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest payments 810 bonds; $1,000 face value; 8% stated rate; 10 years; semiannual interest payments 2,110 bonds; $500 face value; 12% stated rate; 15 years; semiannual interest payments Required: Assuming the market rate of interest is 10%, calculate the selling price for each bond issue. If...
Issue Price The following terms relate to independent bond issues: 640 bonds; $1,000 face value; 8%...
Issue Price The following terms relate to independent bond issues: 640 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest payments 640 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest payments 830 bonds; $1,000 face value; 8% stated rate; 10 years; semiannual interest payments 1,950 bonds; $500 face value; 12% stated rate; 15 years; semiannual interest payments Use the appropriate present value table: PV of $1 and PV of Annuity of $1 Required: Assuming the...
Issue Price The following terms relate to independent bond issues: 420 bonds; $1,000 face value; 8%...
Issue Price The following terms relate to independent bond issues: 420 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest payments 420 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest payments 820 bonds; $1,000 face value; 8% stated rate; 10 years; semiannual interest payments 2,190 bonds; $500 face value; 12% stated rate; 15 years; semiannual interest payments Use the appropriate present value table: PV of $1 and PV of Annuity of $1 Required: Assuming the...
Issue Price The following terms relate to independent bond issues: 530 bonds; $1,000 face value; 8%...
Issue Price The following terms relate to independent bond issues: 530 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest payments 530 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest payments 900 bonds; $1,000 face value; 8% stated rate; 10 years; semiannual interest payments 2,160 bonds; $500 face value; 12% stated rate; 15 years; semiannual interest payments Use the appropriate present value table: PV of $1 and PV of Annuity of $1 Required: Assuming the...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT