10. You are considering purchasing a corporate bond with exactly twenty years le
ID: 2815884 • Letter: 1
Question
10. You are considering purchasing a corporate bond with exactly twenty years left until it matures. This bond has an 8% annual coupon rate and makes interest payments semiannually. Its face value (or maturity value) is $25,000, which you expect to receive at the end of the twentieth year. How much would you pay for this bond today if a. you required an APR six percent compounded semiannually? b. you required an APR ten percent compounded semiannually? c. you required an APR eight percent compounded semiannually?Explanation / Answer
Using financial calculator BA II Plus - Input details:
a.
b.
c.
I/Y = R = Rate or yield / frequency of coupon in a year =
3.000000
5.000000
4.000000
PMT = Coupon rate x FV / frequency =
-$1,000.00
-$1,000.00
-$1,000.00
N = Number of years remaining x frequency =
40
40
40
FV = Future Value =
-$25,000.00
-$25,000.00
-$25,000.00
CPT > PV = Present value of bond =
$30,778.69
$20,710.23
$25,000.00
Formula for bond value = |PMT| x ((1-((1+R%)^-N)) / R%) + (|FV|/(1+R%)^N)
$30,778.69
$20,710.23
$25,000.00
Using financial calculator BA II Plus - Input details:
a.
b.
c.
I/Y = R = Rate or yield / frequency of coupon in a year =
3.000000
5.000000
4.000000
PMT = Coupon rate x FV / frequency =
-$1,000.00
-$1,000.00
-$1,000.00
N = Number of years remaining x frequency =
40
40
40
FV = Future Value =
-$25,000.00
-$25,000.00
-$25,000.00
CPT > PV = Present value of bond =
$30,778.69
$20,710.23
$25,000.00
Formula for bond value = |PMT| x ((1-((1+R%)^-N)) / R%) + (|FV|/(1+R%)^N)
$30,778.69
$20,710.23
$25,000.00
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