Homework Answers
| CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID QUARTERLY | ||||||
| Step 1 : Calculation of Semi Annual Coupon Payments | ||||||
| Par value of the bond issued is (300 X $ 1000) | $3,00,000 | |||||
| Annual Coupon % | 8.00% | |||||
| Annual Coupon Amount | 24,000 | |||||
| Quartery Coupon Amount $ 24,000 / 4 | 6,000 | |||||
| Step 2: Calculate number of years to Maturity | ||||||
| Number of years to maturity = 5 years | ||||||
| Interest is paid Quarterly so total period = 5 Years * 4 = 20 Periods | ||||||
| Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds | ||||||
| Market rate of interest or Yield to Maturity or Required Return = 12% | ||||||
| Bonds interest is paid Quarterly means so discounting factor = 12 % / 4 Qtr = 3 % | ||||||
| PVF = 1 / Discount rate = 1/ 1.03 | ||||||
| Result of above will again divide by 1.03 , repeat this lat period | ||||||
| Period | Interest | Amount (In Million) | PVF @ 3% | PresentValue | ||
| 1 | Interest | $6,000.00 | 0.9709 | $5,825.22 | ||
| 2 | Interest | $6,000.00 | 0.9426 | $5,655.55 | ||
| 3 | Interest | $6,000.00 | 0.9151 | $5,490.84 | ||
| 4 | Interest | $6,000.00 | 0.8885 | $5,330.94 | ||
| 5 | Interest | $6,000.00 | 0.8626 | $5,175.66 | ||
| 6 | Interest | $6,000.00 | 0.8375 | $5,024.94 | ||
| 7 | Interest | $6,000.00 | 0.8131 | $4,878.60 | ||
| 8 | Interest | $6,000.00 | 0.7894 | $4,736.52 | ||
| 9 | Interest | $6,000.00 | 0.7664 | $4,598.58 | ||
| 10 | Interest | $6,000.00 | 0.7441 | $4,464.66 | ||
| 11 | Interest | $6,000.00 | 0.7224 | $4,334.64 | ||
| 12 | Interest | $6,000.00 | 0.7014 | $4,208.40 | ||
| 13 | Interest | $6,000.00 | 0.6810 | $4,085.82 | ||
| 14 | Interest | $6,000.00 | 0.6611 | $3,966.84 | ||
| 15 | Interest | $6,000.00 | 0.6419 | $3,851.28 | ||
| 16 | Interest | $6,000.00 | 0.6232 | $3,739.08 | ||
| 17 | Interest | $6,000.00 | 0.6050 | $3,630.18 | ||
| 18 | Interest | $6,000.00 | 0.5874 | $3,524.46 | ||
| 19 | Interest | $6,000.00 | 0.5703 | $3,421.80 | ||
| 20 | Interest | $6,000.00 | 0.5537 | $3,322.14 | ||
| 20 | Bond Principal Value | $3,00,000.00 | 0.5537 | $1,66,107.00 | ||
| Total | $2,55,373.15 | |||||
| Current Bonds Price = | $2,55,373 | |||||
| In given nearest value of the present value of Bonds is $ 255,462 | ||||||
| So investor will pay only $ 255,462 for this bond. | ||||||
| Answer = Option C = $ 255,462 | ||||||
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