Question

The following bonds were issued by the Archer Company in 2013:

Maturity in 10 years

Interest paid every six months at a coupon rate of 4.3%

Face value/maturity value of $2 million.

If the bonds are issued to yield 4%, what amount of cash will be received by Margolis not counting accrued interest or any selling costs. In 2016, after 6 payments, the Archer Company wants to buy back the bonds in the market. If the current market rate on bonds of a similar risk is 5%, what would the market value be of the Archer bonds?

Answer 1

Amount of cash received by Margolis,

Here interest is calculated at semi annually

Coupon rate= $20,00,000*4.3/100 = $86,000

                       = $86,000/2= $43,000.

Therefore Yield to maturity = 4%(0.04) / 2 = 0.02

Time = 10 * 2 = 20 years

Price = $20,00,000*0.02= $40,000

           = $20,00,000+ $40,000 = $20,40,000