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

Bond Price= C x [1-{1/(1+r)n]/r + M/(1+r)n

M= Face Value= $1,000

C= Coupon Amount= $1,000 x 7% x 6/12=$35

r=rate of interest =10% or 5% i.e 0.05

n=9 years x 2=18 periods

= 35 x [1-{1/(1+0.05)18/0.05 + 1,000/(1+0.05)18

=35 x [1-{1/(1.05)18/0.05 +1,000/(1.05)18
=35 x [1-{1/2.406619234]/0.05 + 415.52

=35 x [1-0.41552]/0.05 +415.52

=35 x 0.5244 /0.05 +415.52

=35 x 11.96 +415.52

= $409.14 +415.52

=824.66

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