(Bond valuation) Enterprise, Inc. bonds have an annual coupon rate of 15 percent. The interest is paid semiannually and the bonds mature in 12 years. Their par value is $1,000. If the market's required yield to maturity on a comparable-risk bond is 12 percent, what is the value of the bond? What is its value if the interest is paid annually?
a. The value of the Enterprise bonds if the interest is paid semiannually is $ _______ . (Round to the nearest cent.)
b. The value of the Enterprise bonds if the interest is paid annually is $ _______ . (Round to the nearest cent.)
Par Value of the bond = $1000
Annual coupon rate = 15%
Annual coupon payment = Annual coupon rate*Par value = 15%*1000 = 150
Time to maturity = 12 years
YTM = 12%
Part a
Interest is paid semiannually
we will consider semiannual coupon payment, semiannual YTM and time to maturity in semi-annual periods
Semi-annual coupon payment = Annual coupon payment/2 = 150/2 = 75
Time to maturity in semiannual periods = 12*2 = 24
Semi-annual YTM = 12%/2 = 6%
We can calculate the price of the bond using ba ii plus calculator. Input the following data in ba ii plus calculator:
N = 24
I/Y = 6
PMT = 75
FV = 1000
CPT -> PV [Press CPT and then press PV]
We get, PV = -1188.255363
Price of the bond if interest is paid semiannually is $1188.26 (Rounded to nearest cent)
Answer a -> 1188.26
Part b
Interest is paid annually. Here we will take annual coupon payments, time to maturity in years, and YTM in bond's price calculation
Input the following data in ba ii plus calculator
N = 12
I/Y = 12
PMT = 150
FV = 1000
CPT -> PV [Press CPT and then press PV]
We get, PV = -1185.831227
Price of the bond if interest is paid annually = $1185.83 (Rounded to nearest cent)
Answer b -> 1185.83
(Bond valuation) Enterprise, Inc. bonds have an annual coupon rate of 15 percent
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