International Cruise Lines sold an issue of 15-year $1,000 parbonds to build new

Question

International Cruise Lines sold an issue of 15-year $1,000 parbonds to build new ships. The bonds pay 6.85% interest,semi-annually. Today's required rate of return is 8.35%. How muchshould these bonds sell for today? Round off to the nearest$1.
a. $1,065 b. $873 c. $936 d. $918 International Cruise Lines sold an issue of 15-year $1,000 parbonds to build new ships. The bonds pay 6.85% interest,semi-annually. Today's required rate of return is 8.35%. How muchshould these bonds sell for today? Round off to the nearest$1.
a. $1,065 b. $873 c. $936 d. $918

Explanation / Answer

15 years

Par Value of theBond $1,000 Semi annual Coupon Payment [$1,000 *(6.85%/2)] $34.25 Nubmer of years toMaturity

15 years

Rate of Return (YTM) [8.35% /2] 4.175% Calculating BondPrice: BondValue = Present Value of the Coupons + Present Value ofthe Face Amount Bond Value = C *[1-1/(1+r)t]/r    +    F /(1+r)t Bond Value= $34.25 * [1-1/(1+0.04175)15*2] /0.04175 + $1,000 / (1+0.04175)15*2 Bond Value =$34.25   * [1-1/(1.04175)30] /0.04175 + $1,000 / (1.04175)30 Bond Value =$34.25   * 16.930467 +   [$1,000 / 3.411185005] Bond Value = $579.86 +$293.15 Bond Value= $873 Answer is Option (b)$873

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