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

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1)

n	20
i	4% / 2 = 2%
Cash flow	Amount	Present Value
Interest	2000000*4.3% / 2 = 43000	43000 * 16.3514 = 703110
Principal	2000000	2000000 * 0.6730 = 1346000
	Total	2049110

2)

Par value = $2000000

Reqd Interest rate = 5% / 2 = 2.5 % ( since int is paid semi annually )

Time period = 10 – 3 = 7 yrs * 2 times = 14

Current bond price = Par value / ( 1 + Interest )^n

              = $2000000 / 1.025 ^ 14 = $ 1415454.39 approx