Question

Pharoah, Inc., has outstanding bonds that will mature in six years and pay an 8 percent coupon semiannually. If you paid $1,041.55 today and your required rate of return was 6.5 percent. (Round intermediate calculations to 5 decimal places, e.g. 1.25145 and final answer to 2 decimal places, e.g. 15.25.) Excel Template (Note: This template includes the problem statement as it appears in your textbook. The problem assigned to you here may have different values. When using this template, copy the problem statement from this screen for easy reference to the values you've been given here, and be sure to update any values that may have been pre-entered in the template based on the textbook version of the problem.) How much should you have paid for the bond? Worth of the bond $ Did you pay the right price for the bond? Fair Open Show Work u would like to Show Work for this question: Good Bad

Answer 1

Worth of the bond is the present value of the coupons and principal repayment received at maturity, discounted at the required rate of return.

In this case, semi-annual payment = $1000*0.04 = $40 for 12 semi-annual periods.

Assuming face value of the bond as $1000 and full redemption of the principal at face value only at maturity, fair value or worth of the bond today = $1073.55 (Derived from PV = (A/i) * (1-(1+i)^(-n))

where A: periodic payment

i is the interest rate per period

n is the number of periods

Since you paid $1041.55; you have made a profit and hence paid the right price economically.