Question

Hodson Corp. purchased five $1,000 4% bonds of Eagle Corporation when the market rate of interest was 8%. Interest is paid semiannually, and the bonds will mature in five years. Using the PV function in Excel, compute the price Hodson paid (the present value) for the bond investment. (Assume that all payments of interest and principal occur at the end of the period. Round your answer to the nearest cent.) Hodson paid on the bond investment.

Answer 1

Answer:- The present value of bond investment = $837.82.

Explanation-Calculation of selling price of bond at issuance=

                B₀ =C/2 {1-(1+r/2)^-2t}/ r/2 +F/(1+r/2)^-2t

Where:-

Bo = Bond price

C= Coupon payment

r = Interest Rate

F= Face value

t = Years/Periods

Since the interest is paid semi-annually the bond interest rate per period is 2% (= 4%/ 2), the market interest rate is 4% (= 8%/ 2) and number of time periods are 10 (= 2*5). Hence, the price of the bond is calculated as the present value of all future cash flows as shown below:-

Price of Bond =2%*$1000*{1-(1+4%)^-10/4%} +$1000/(1+4%)¹⁰

                         =($20*8.1109)+ ($1000*0.6756)

                         = $162.22+$675.6

                         =$837.82