Question

Orlando Builders Inc. issued a bond with a par value of $1,000, a coupon rate of 9.00% (semiannual coupon), and a yield to maturity of 5.80%. The bond has 19 years to maturity. What is the value of the bond?

Answer 1

Answer:

Price of bond = $1,365.54

Explanation:

The value of the bond is the present value (PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).  

Value of Bond = PV of interest + PV of RV  

The value of bond for Orlando Builders Inc.  can be worked out as follows:  

Step 1  

PV of interest payments  

Semi annul interest payment  

= 9% × 1000 × 1/2 = 45  

Semi-annual yield = 5.80%/2 = 2.9 % per six months  

Total period to maturity (in months)  

= (2 × 19) = 38  periods  

PV of interest =  

45 × (1- (1+0.029)^(-21)/0.029)= 1028.087

Step 2  

PV of Redemption Value  

= 1000 × (1.029)^(-19×2) =337.45

Price of bond  

= 1028.08 + 337.45 =1365.54

Price of bond = $1,365.54