barkley corportation has a bond issue outstanding with an annual coupon rate of
ID: 2705688 • Letter: B
Question
barkley corportation has a bond issue outstanding with an annual coupon rate of 7% and years remaining until maturity. the par value of the bond is $1,000.
A.) What is the price of the bond if present market conditions justify a 14% required rate of return. The bond pays interest annually
B.) What would be the current value of the bond if the bond has a semiannual coupon?
C.) Assume an annual coupon but 20 years remaining to maturity. What is the current value under these conditions? Also what is the bond's current yield?
Explanation / Answer
A.) What is the price of the bond if present market conditions justify a 14% required rate of return. The bond pays interest annually
We have Par value = FV = 1000
Coupon is 7%. So PMT = 7%*1000 = 70
No of periods = nper = 4
Current Rate of return =Rate= 14%
So Current proce = PV(rate,nper,pmt,fv)
= PV(14%,4,70,1000) = $796.04
B.) What would be the current value of the bond if the bond has a semiannual coupon?
If semiannnual coupon, then PMT = 7%*1000/2 = 35
No of periods = nper = 4*2 = 20
Current Rate of return = Rate = 14%/2 = 7%
So Current proce = PV(rate,nper,pmt,fv)
= PV(7%,8,35,1000) = $791.00
C.) Assume an annual coupon but 20 years remaining to maturity. What is the current value under these conditions? Also what is the bond's current yield?
We have Par value = FV = 1000
Coupon is 7%. So PMT = 7%*1000 = 70
No of periods = nper = 20
Current Rate of return =Rate= 14%
So Current proce = PV(rate,nper,pmt,fv)
= PV(14%,20,70,1000) = $536.38
Current yield = CUrrent coupon/currnet price = 70/$536.38 = 13.05%
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