Question

Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His broker quotes a price of $1,100. Jim is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 10 percent interest, and it has 15 years remaining until maturity. The current yield to maturity on similar bonds is 8 percent.
a. Calculate the present value of the bond. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)

Answer 1

Present Value of the Bond

The Present Value of the Bond is the Present Value of the Coupon payments plus the Present Value of Par Value

Par Value = $1,000

Annual Coupon Amount = $100 [$1,000 x 10%]

Yield to Maturity (YTM) = 8%

Maturity Years = 15 Years

Present Value of the Bond = Present Value of the Coupon payments + Present Value of Par Value

= $100[PVIFA 8%, 15 Years] + $1,000[PVIF 8%, 15 Years]

= [$100 x 8.55948] + [$1,000 x 0.31524]

= $855.95 + $315.24

= $1,171.19

“Hence, the Present Value of the Bond would be $1,171.19”