Question

Flower Valley Company bonds have a 10.36 percent coupon rate. Interest is paid semiannually. The bonds have a par value of $1,000 and will mature 28 years from now. Compute the value of Flower Valley Company bonds if investors’ required rate of return is 11.44 percent. Round the answer to two decimal places.

Answer 1

Given,

Coupon rate = 10.36%

Par value = $1000

Years to maturity = 28 years

Required rate of return = 11.44% or 0.1144

Solution :-

Semi annual coupon payment (C) = $1000 x 10.36% x 6/12 = $51.80

Semi annual periods (n) = 28 years x 2 = 56

Semi annual required return (r) = 0.1144/2 = 0.0572

Value of bond

= C/r x [1 - (1 + r)^-n] + [face value x (1 + r)^-n]

= $51.80/0.0572 x [1 - (1 + 0.0572)^-56] + [$1000 x (1 + 0.0572)^-56]

= $51.80/0.0572 x [1 - (1.0572)^-56] + [$1000 x (1.0572)^-56]

= $51.80/0.0572 x [1 - 0.04438123163] + [$1000 x 0.04438123163]

= $51.80/0.0572 x 0.95561876837 + [$44.38123163]

= $865.403010516 + $44.38123163

= $909.78

Thus, value of Flower Valley Company bonds is $909.78