Question

Flora​ Co.'s bonds, maturing in 17 ​years, pay 11 percent interest on a $ 1000 face value.​ However, interest is paid semiannually. If your required rate of return is 15 ​percent, what is the value of the​ bond? How would your answer change if the interest were paid​ annually?

Answer 1

if interest paid semiannualy:

coupon rate = 5.5% (11% / 2)

interest = 1000*5.5% = 55

required return = 7.5% (15 / 2 )

time period = 17 x 2 = 34

value of the bond can be calculated using excel or financial calulator:

value of the bond = $756.14

if interest paid annually:

coupon rate = 11%

interest = 1000*11% = 11

required return = 15%

time period = 17

Price of the bond:

Price = $758.11