What are the steps taken to figure out this problem? My company has an issue of

Question

What are the steps taken to figure out this problem?

My company has an issue of $1000 par value bonds with a 14% annual interest rate. The issue has 10 years remaining to the maturity date. Bonds of similar risk are currently selling to a yield of 12% rate of return. What is the current value of my stock?

My attempt looks like this:

pricec of bond = 14% * $1000 * [ ((1 - (1 + 12%)^-10)/14%) * 1000/(1 + 14%)^10] = $47644

Of course that does not come out right. Any help? I know the final answer should be $1,113, but I don't know how to get there.

Explanation / Answer

current price of bond = PVAF@12%,10years *Interest +   PVF@ 12%,10years *par value

                              = (    5.65022*140 ) +( .32197 * 1000)

                             = 791.03 +321.97

                            = $ 1113 per bond

**Interest = 1000*14% = $ 140

**Since there is a annuity of interest for 10 years you will use present value annuity table to find value @12%, for 10 years.

**for par value you will use present value table as there is a single payment at the end of 10 years.

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