Question

Waddle Enterprise issued an 8-year, 10% bond on January 1, 20X9. Each bond sold for face value, which is $1,000. The bonds pay interest semi-annually on June 30 and December 31. The bonds mature on December 31, 2X15. Using present value tables, what is the market price of each $1,000 bond on January 1, 2X11, if the market rate of interest has changed to 8%?

Answer 1

On January 1, 2X11, bond has 5 years remaining life.

Interest each period = ($1,000 * 10%)/2 = $50

The bonds pay interest semi-annually on June 30 and December 31, hence
Market rate of interest per period = (8/2)% = 4%

Total remaining periods = 5 * 2 = 10

Market price = ($50 * PV of an ordinary annuity of $1 @4% for 10 periods) + $1,000 * Present value of 1 @4% at the end of 10 periods) = ($50 * 8.1109) + ($1,000 * 0.6756) = $1,081.15

The market price of each $1,000 bond on January 1, 2X11 is $1,081.15