(Bond valuation) Flora Co.'s bonds, maturing in 9 years, pay 7 percent interest on a $1,000 face value. However, interest is paid semiannually. If your required rate of return is 9 percent, what is the value of the bond? How would your answer change if the interest were paid annually?
a. If the interest is paid semiannually, the value of the bond is $ . (Round to the nearest cent.)
a. The value of the bond is computed as shown below:
Coupon payment is computed as follows:
= 7% / 2 x $ 1,000 (since interest payments are semi annually, hence divided by 2)
= $ 35
YTM will be as follows:
= 9% / 2 (since interest payments are semi annually, hence divided by 2)
= 4.5% or 0.045
N will be as follows:
= 9 x 2 (since interest payments are semi annually, hence multiplied by 2)
= 18
So the price of the bond will be:
= $ 35 / 1.0451 + $ 35 / 1.0452 + $ 35 / 1.0453 + $ 35 / 1.0454 + $ 35 / 1.0455 + $ 35 / 1.0456 + $ 35 / 1.0457 + $ 35 / 1.0458 + $ 35 / 1.0459 + $ 35 / 1.04510 + $ 35 / 1.04511 + $ 35 / 1.04512 + $ 35 / 1.04513 + $ 35 / 1.04514 + $ 35 / 1.04515 + $ 35 / 1.04516 + $ 35 / 1.04517 + $ 35 / 1.04518 + $ 1,000 / 1.04518
= $ 878.40 Approximately
b. The value of the bond is computed as shown below:
Coupon payment is computed as follows:
= 7% x $ 1,000
= $ 70
YTM will be as follows:
= 9% or 0.09
N will be as follows:
= 9
So the price of the bond will be:
= $ 70 / 1.091 + $ 70 / 1.092 + $ 70 / 1.093 + $ 70 / 1.094 + $ 70 / 1.095 + $ 70 / 1.096 + $ 70 / 1.097 + $ 70 / 1.098 + $ 70 / 1.099 + $ 1,000 / 1.099
= $ 880.10 Approximately
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