Question

El Sol Inc. is offering its bonds on the market at 8% annual interest but ensures...

El Sol Inc. is offering its bonds on the market at 8% annual interest but ensures that they are paid semi-annually for 7 years. The prevailing market interest rate is currently 10%. What is the value of the bonds?

Present value $ ____________ is sold with a premium or discount ______________

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Answer #1

Information provided:

Par value= future value= $1,000

Time= 7 years*2= 14 semi-annual periods

Coupon rate= 8%/2= 4%

Coupon payment= 0.04*1,000= $40 per semi-annual period

Yield to maturity= 10%/2= 5% per semi-annual period

The present value of the bond is calculated by computing the value of the bond.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 40

I/Y= 5

N= 14

Press the CPT key and PV to compute the present value.

The value obtained is 901.01.

Therefore, the value of the bond is $901.01.

The bond is a discount bond since it trades below the par value.

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