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A shipping company sold an issue of 14-year $1,000 par bonds to build new ships. The bonds pay 12% interest, compounded semia

(1) (ii) (iii) Describe and interpret the assumptions related to the problem. Apply the appropriate mathematical model to sol

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Answer #1
Par/Face value 1000
Annual Coupon rate 0.12
Annual coupon 120
semi-annual coupon 60
Present Value = Future value/[(1+(r/m))^mt]
r is the interest rate that is 7.5%.
m is the compounding period that is 2
mt is the time period.
price of the bond = sum of present values of future cash flows
r/2 0.0375
mt 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
future cash flow 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 1060
present value 57.83133 55.74104 53.7263 51.78439 49.91266 48.10859 46.36972 44.69371 43.07827 41.52123 40.02046 38.57394 37.1797 35.83586 34.54058 33.29213 32.0888 30.92896 29.81105 28.73354 27.69498 26.69396 25.72911 24.79915 23.90279 23.03883 22.20611 378.1281
sum of present values 1385.97
These bonds should sell for $1385.97 today.
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