Question

Acme, Ltd. issued a bond having a par value of $1,000, a ten-year life and a 10% coupon rate. If interest is paid semiannually and investors require an 11% rate of return, what is the value of the bond?

Answer 1

Answer : Calculation of Value of Bond

Value of Bond = Coupon * Present value Annuity factor @ 5.5% for (n= 20)+ Face value * Present value factor @ 5.5% for (n= 20th)

Coupon Rate ( Annual ) = 10%

Coupon Rate (Semiannual) = 10% / 2 = 5%

Coupon = 1,000 * 5%

= $50

Required rate of Return per annum = 11%

Required rate of return half year = 11% / 2 = 5.50%

n = 10*2 = 20 ( as compounding semiannually)

Value of Bond = (50 * 11.9503824838) + (1,000 * 0.34272896327)

= 597.5191 + 342.72896

= $940.24806 or $ 940.25