Regatta Inc. has seven-year bonds outstanding that pay a 12 percent coupon rate. Investors buying these...
Regatta Inc. has seven-year bonds outstanding that pay a 12 percent coupon rate. Investors buying these bonds today can expect to earn a yield to maturity of 8.875 percent. What is the current value of these bonds? Assume annual coupon payments.
Homework Answers
Annual coupon=$1000*12%=$120
Hence current value=Annual coupon*Present value of annuity factor(8.875%,7)+$1000*Present value of discounting factor(8.875%,7)
=$120*5.054131966+$1000*0.551445788
which is equal to
=$1157.94(Approx).
NOTE:
1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$120[1-(1.08875)^-7]/0.08875
=$120*5.054131966
2.Present value of discounting factor=$1000/1.08875^7
=$1000*0.551445788
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