Question

0You are considering purchasing a corporate bond with exactly twenty years left until it matures. This bond has an 8% annual coupon rate and makes coupon payments semiannually. Its face value (or maturity value) is $40,000, which you expect to receive at the end of the twentieth year. How much would you pay for this bond today if

a. you required an APR six percent compounded semiannually?

b. you required an APR ten percent compounded semiannually?

c. you required an APR eight percent compounded semiannually

DO NOT USE EXCEL

Answer 1

DE b 1 given 2 face value 3 coupon value 4 period 40000 1600 = 40000*8%/2 40 = 20 years 2 6 value of bond today=disocunted value of the all future cash inflow if the inerest rate is 6% annual 8 semiannual rate=6%/2=3% =c((1-(1+i)^-n]/i+b/(1+i)^n =1600*(1-(1+3%)^-40)/3%+40000/(1+3%) 40 49,245.91 answer 13 14 where c is the cash flow 15 I is the rate of interest 16 n is the period of payments 17 b is the bond value 18 19 if the inerest rate is 10% annual semiannual rate=10%/2=5% =c* ((1-(1+i)^-n)/i+b/(1+i)n =1600*(1-(1+5%)^-40)/5%+40000/(1+5%) 40 33,136.37 answer $33,136.37 if the inerest rate is 8% annual 29 semiannual rate=8%/2=4% =c* ((1-(1+i)^-n]/i+b/(1+i)^n =1600*(1-(1+4%)^-40)/4%+40000/(1+4%) 40 40,000.00 anser