Heather Smith is considering a bond investment in Locklear Airlines. The $1,000

Question

Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 7 percent and the interest is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. There are 9 years to maturity.

Compute the price of the bonds based on semiannual analysis. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Compute the price of the bonds based on semiannual analysis. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Explanation / Answer

Semi-annual yield = 10% / 2 = 5%

Semi-annual coupon payment = $1,000 x 7% x (1/2) = $35

Number of periods = 9 x 2 = 18

Price of bond ($) = Present value (PV) of all future cash flows

= PV of coupon payments + PV of redemption price (Face value)

= 35 x PVIFA(5%, 18) + 1,000 x PVIF(10%, 9)

= 35 x 11.6896 (From PVIFA table) + 1,000 x 0.4241 (From PVIF table)

= 409.14 + 424.10

= 833.24

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