A private, for profit clinic has a bond issue outstanding with a coupon rate of
ID: 2715538 • Letter: A
Question
A private, for profit clinic has a bond issue outstanding with a coupon rate of 8 percent and five years remaining until maturity. The par value of the bond is $1000, and the bond pays interest annually. What is the current value of the bond if present market conditions justify a 16% required rate of return? Now suppose the center’s five-year bond had semiannual coupon payments. What is its current value? (assume an 8% semiannual required rate of return. But the actual rate would be slightly less than 8% because a semiannual coupon bond is slightly less risky than an annual coupon bond). Now assume that the center’s bond had a semiannual coupon but 30 years remaining to maturity. What is the current value under these conditions? (assume an 8% semiannual required rate of return. But the actual rate would be slightly greater than 7% because of increased price risk).
Explanation / Answer
5 year bond PV Factor 16% Present Value Interest 80 3.274293654 261.94 face value 1000 0.476113015 476.11 Current value of Bond 738.06 Semi Annual 5 year bond PV Factor Interest 40 6.710081399 268.40 face value 1000 0.463193488 463.19 Current value of Bond 731.60 Semi Annual bond 30 year PV Factor Interest 40 12.37655182 495.06 face value 1000 0.009875854 9.88 Current value of Bond 504.94
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