Question

24) To expand its business, the Kingston Outlet factory would like to issue a bond with par value of $1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate of return is:

1) 8 percent,

2) 10 percent,

3) 12 percent?

Answer all three.

Answer 1

Value of the Bond = I ( PVIFA_k,n ) + F ( PVIF_k,n )

Where :

PVIFA = present value interest factor of an annuity

PVIF = present value interest factor

k = discount rate ( market rate of interest )

n = number of periods

Here Par value of bond = 1000

coupon rate = 10%

So , Interest is fixed in all required rate = 1000*10% = 100

Future value (F) is same for all = 1000

n = 10 years

1 . Required Rate of Return = 8%

Value of the bond = 100( 6.1265 ) + 1000 ( 0.463 )

= 612.65 + 463

= 1075.65

2. Required Rate of Return = 10%

Value of the bond = 100 ( 6.1446 ) + 1000 ( 0.385 )

= 614.46 + 385

= 999.46

3. Required Rate of Return = 12%

Value of the Bond = 100 ( 6.1025 ) + 1000 ( 0.322 )

= 610.25 + 322

= 932.25