Question

On January 1, 2005, Systil Corporation issues $50 million, 10-year bonds with a coupon rate of...

On January 1, 2005, Systil Corporation issues $50 million, 10-year bonds with a coupon rate of 10%. Interest is payable annually at the end of the year. If the required return on bonds of similar risk at January 1, 2006, is 8%, what will be the price of the bonds be at this date?

A.

$56.71 million

B.

$56.25 million

C.

$44.24 million

D.

$43.86 million

On January 1, 2005, Systil Corporation issues $50 million, 10-year bonds with a coupon rate of 10%. Interest is payable annually at the end of the year. If the required return on bonds of similar risk at January 1, 2006, is 8%, what will be the price of the bonds be at this date?

A.

$56.71 million

B.

$56.25 million

C.

$44.24 million

D.

$43.86 million

Please give the detailed column formula

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Homework Answers

Answer #1

Interest paid by bond = 10% of $50 million = $5 million

Present value of the bond = $50 million * PVIF(8%,10) = $50 million * 0.4632 = $23.16 million

Present value of interest payments = $5 million * PVIFA(8%,10) = $5 million * 6.7101 = $33.55 million

Bond price = Present Value of bond + Present value of interest payments = $23.16 million + $33.55 million = $56.71 million

If the required return on bonds of similar risk at January 1, 2006, is 8%, price of the bonds be at this date is $56.71 million.

Answer is

A.

$56.71 million
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