Problem 1 (See pages 296 – 301 and 307) Humana Inc. is a for-profit American hea

Question

Problem 1 (See pages 296 – 301 and 307)

Humana Inc. is a for-profit American health insurance company based in Louisville, Kentucky. The company has a series of $1,000 par value bonds outstanding. Each bond pays interest semi-annually and carries an annual coupon rate of 6%. Some bonds are due in four years while others are due in 10 years. If the required rate of return on bonds is 9%, what is the current price of: (PLEASE SHOW YOUR WORK)

a) The bonds with 4 years to maturity?

b) The bonds with 10 years to maturity?

Explanation / Answer

price of bond = coupon payment * [1-(1+i)^-n ]/i + facevalue/(1+i)^n

a)

price = 60/2 * [1-(1+9%/2)^-8]/9%/2 + 1000/(1+9%/2)^-8

= 901.06

b)

price = 60/2 * [1-(1+9%/2)^-20]/9%/2 + 1000/(1+9%/2)^-20

= 804.88

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