Question

# A HCA bond, maturing in 7 years, pays 8 percent interest on a \$1,000 face value....

A HCA bond, maturing in 7 years, pays 8 percent interest on a \$1,000 face value. However interest is paid semi-annually. If your required rate of return is 10 percent, what is the value of the bond? What is the value if the interest were paid annually?

When the interest is paid semi annually:

Coupon payment = 0.08 * 1000 = 80 / 2 = 40

Number of periods = 7 * 2 = 14

Interest rate = 0.10 / 2 = 0.05 or 5%

Value of bond = Coupon payment * [ 1 - 1 / ( 1 + R)n] / R + Face value / ( 1 + R)n

Value of bond = 40 * [ 1 - 1 / ( 1 + 0.05)14] / 0.05 + 1000 / ( 1 + 0.05)14

Value of bond = 40 * 9.898641 + 505.06795

Value of bond = \$901.01

You can also find this using a finanical calculator: 2nd I/Y 2, FV 1000, PMT 40, N 14, I/Y 10, CPT PV

When interest is paid annually:

Number of periods = 7

rate = 10%

Coupon payment = 80

Value of bond = 80 * [ 1 - 1 / ( 1 + 0.1)7] / 0.1 + 1000 / ( 1 + 0.1)7

Value of bond = 80 * 4.868419 + 513.158118

Value of bond = \$902.63

You can also find this using a finanical calculator: 2nd I/Y 1, FV 1000, PMT 80, N 7, I/Y 10, CPT PV

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