Question

FINC3320
Bradshaw Inc is issuing 10 year bonds with a coupon rate of 6% and a face value of 1,000. Coupon payments are paid semiannually and return on bonds with similar risk is currently 8%, how much would you be willing to pay for one of these bonds?*** Please break down the problem and how each part of the equation was calculated***

Answer 1

Issue Price of the Bond

Face Value = $1,000

Semi-annual coupon amount = $30 [$1,000 x 6.00% x ½]

Semi-annual Yield to Maturity = 4.00% [8.00% x ½]

Maturity Period = 20 Years [10 Years x 2]

Therefore, the Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $30[PVIFA 4.00%, 20 Years] + $1,000[PVIF 4.00%, 20 Years]

= [$30 x 13.59033] + [$1,000 x 0.45639]

= $407.71 + $456.39

= $864.10

Hence, the Price of the Bond is $864.10

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.