Question

Calculate the fair present values of the following bonds, all of which pay interest semiannually, have a face value of $1,000, have 12 years remaining to maturity, and have a required rate of return of 10 percent. (LG 3-5) a. The bond has a 6 percent coupon rate. b. The bond has a 8 percent coupon rate.

Answer 1

Answer:

the bonds' current market value = PV of face value + PV of coupon payments

a. The bond has a 6 percent coupon rate.

PV of face value = $1,000 / (1 + 5%)²⁴ = $310.07

PV of coupon payments = 30 x 13.799 (PV annuity factor, 5%, 24 periods) = $413.97

bond's market value = $724.04

b. The bond has a 8 percent coupon rate.

PV of face value = $1,000 / (1 + 5%)²⁴ = $310.07

PV of coupon payments = 40 x 13.799 (PV annuity factor, 5%, 24 periods) = $551.96

bond's market value = $862.03