Question

(Bond valuation) Hamilton, Inc. bonds have a coupon rate of 15 percent. The interest is paid semiannually, and the bonds mature in 12 years. Their par value is $1,000. If your required rate of return is 11 percent, what is the value of the bond? What is the value if the interest is paid annually? a. If the interest is paid semiannually, the value of the bond is $___?

Answer #1

Price of the bond = PV of all the Coupon payments + PV of the Par value of the bond

We will use BA 2 Plus Financial calculator to find the Price of the bond if the interest is paid semiannually:

N(number of coupon payments) = 12*2 = 24

I/Y(Interest rate per period) = 11%/2 = 5.5%

FV(Face Value) = $1000

PMT(Coupon payment per period) = (15%*$1000)/2 = $75

CMPT PV

Price of the semiannual bond = $1,263.0340

We will use BA 2 Plus Financial calculator to find the Price of the bond if the interest is paid annually:

N(number of coupon payments) = 12

I/Y(Interest rate per period) = 11%

FV(Face Value) = $1000

PMT(Coupon payment per period) = (15%*$1000) = $150

CMPT PV

Price of the annual bond = $1,259.6942

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