Question

To finance a new line of product, Larissa Toys has issued a bond with a par value of $1,000, coupon rate of 8 percent, and maturity of 30 years. (20p)

1. Compute the price of the bond if the required return on the bond is 10% and interest is paid annually.
2. Compute the price of the bond if the required return on the bond is 10% and interest is paid semi-annually.
3. !!!will not be solved with excel!!!

Answer 1

Price of a bond = Present Value of Coupon amount and Face Value discounted at required return.

a.

Interest is paid annually.

Required Return =10%

Face Value = 1000

Coupon Amount =0.08*1000 = 80

Total Coupon Payment = 30

Price of bond = 80/ (1+0.1)^1 +80/ (1+0.1)^2 +80/ (1+0.1)^3 +80/ (1+0.1)^4 +80/ (1+0.1)^5 + .......... +80/ (1+0.1)^30 + 1000/ (1+0.1)^30  

Price of bond = $811.46 Answer

b.

Interest is paid semi - annually.

Required Return =5% (semi annual)

Face Value = 1000

Coupon Amount =0.04*1000 = 40

Total Coupon Payment = 60

Price of bond = 40/ (1+0.05)^1 +40/ (1+0.05)^2 +40/ (1+0.05)^3 +40/ (1+0.05)^4 +40/ (1+0.05)^5 + .......... +40/ (1+0.05)^60 + 1000/ (1+0.0.05)^60

Price of bond = $810.71 Answer