Question

Moerdyk Corporation's bonds have a 12-year maturity, a 9.55% semiannual coupon, and a par value of $1000. The going interest rate (rd) is 5.95%, based on semiannual compounding. What is the bond's price?

Answer 1

Given that:
Par value=Face value=$1000
Coupon rate=9.55%
As the compounding is done on a semiannual basis, semiannual coupon rate=9.55%/2=4.775%
Semiannual coupon payment=Face value*Semiannual coupon rate=$1000*4.775%=$47.75

Years to maturity=12
As the compounding is done on a semiannual basis, total number of periods=12*2=24

Going interest rate (rd)=Yield to maturity or YTM=5.95%
As the compounding is done on a semiannual basis, semiannual yield to maturity=5.95%/2=0.02975 or 2.975% or 2.98% (Rounded up to two decimal places)

Using excel, we calculated the present value of the bond as $1305.66
Note: As present value is a cash outflow, it is shown with a negative sign in excel.