Question

The Florida Investment Fund buys 96 bonds of the Gator Corporation through a broker. The bonds pay 11 percent annual interest. The yield to maturity (market rate of interest) is 12 percent. The bonds have a 25-year maturity. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Using an assumption of semiannual interest payments:

a. Compute the price of a bond. (Do not round intermediate calculations and round your answer to 2 decimal places.)

Price of the bond

b. Compute the total value of the 96 bonds. (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

Total value

Answer 1

Requirement(a) – Price of the Bond

Face Value of the bond = $1,000

Coupon Amount = $1,000 x 11% x ½ = $55

Yield to Maturity = 12% / 2 = 6%

Maturity Period = 25 Years x 2 = 50 Years

Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $55[PVIFA 6%, 50 Years] + $1,000[PVIF 6%, 50 Years]

= [$55 x 15.761860] + [$1,000 x 0.054288]

= $866.90 + 54.29

= $921.19

“The Price of the Bond = $921.19”

(b) - Total value of the 96 bonds.

Total value of the 96 Bond = Number of Bonds x Price per Bond

= 96 Bonds x $921.19 per Bond

= $88,434.31

“Total Value = $88,434.31”