L STATE UNIVERSITY June 10- June 16 (Chapter 7: Bonds and interest Ranes) Take T

Question

L STATE UNIVERSITY June 10- June 16 (Chapter 7: Bonds and interest Ranes) Take Test: Quiz Bond Valuation Take Test: Quiz: Bond Valuation Test Information Remaining Time: 27 minutes, 09 seconds y Question Completion Status ?Moving to another question wilavo this response Question 2 Ken Rogers is interested in buying a five-year bond that pays a coupon of 10% on a semiannual basis. The current market rate for is 8.8%. What should be the current price of this bond? similar bonds Equity is the worth of an asset minus the amount of lisbliries on said aset 1134 words Page 1 of 4

Explanation / Answer

Let us say the face value of the bond is 1000

Then semiannual interest would be (1000 * 0.1 * 6 / 12) = 50

Market rate of the bonds is 8.8% that is 4.4% semiannually

Now the current price of the bond is the present value of its future cash flows

Future cash flows for this bond would be semiannual interests for 5 years and the redemption amount received on maturity that is 1000

Computing Present value

Hence the current price of the bond is 1047.685

Semiannual interest installment number Cash Inflow Present Value Factor @ 4.4% Present value 1 50 0.9578 47.89 2 50 0.9175 45.875 3 50 0.8788 43.94 4 50 0.8418 42.09 5 50 0.8063 40.315 6 50 0.7723 38.615 7 50 0.7398 36.99 8 50 0.7086 35.43 9 50 0.6787 33.935 10 50 0.6501 32.505 Face Value redeemed - 1000 0.6501 650.1 Net Present Value 1047.685

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.