Question

Problem 7-6 The Sampson Company issued a $1,000 bond 5 years ago with an initial term of 25 years and a coupon rate of 8%. Today's interest rate is 10%. Do not round intermediate calculations. Round PVFA and PVF values in intermediate calculations to four decimal places. a. What is the bond's current price if interest is paid semiannually as it is on most bonds? Round the answer to the nearest cent. $ 5,000 x b. What is the price if the bond's interest is paid annually? Round the answer to the nearest cent. 3,000 Comment on the difference between (a) and (b). The input in the box below will not be graded, but may be reviewed and considered by your instructor. c. What would the price be if interest was paid semiannually and the bond was issued at a face value of $1500? Do not round intermediate calculations. Round the answer to the nearest cent. $ 7,500 x Feedback

Answer 1

7-6 . Semiannual coupon =8%*1000/2 =40
Semi annual YTM =10%/2 =5%
Number of periods =20*2 =40
a. Price of Bond =PV of Coupons +PV of Par Value =40*((1-(1+5%)^-40)/5%)+1000/(1+5%)^40=828.41

b.Number of Periods =20
YTM =10%
Semiannual coupon =8%*1000 =80
Price of Bond =PV of Coupons +PV of Par Value =80*((1-(1+10%)^-20)/10%)+1000/(1+10%)^20=829.73

Difference between =829.73-828.41 =1.32

c. Face Value =1500
Semiannual coupon =8%*1500/2 =60
Semi annual YTM =10%/2 =5%
Number of periods =20*2 =40
Price of Bond =PV of Coupons +PV of Par Value =60*((1-(1+5%)^-40)/5%)+1500/(1+5%)^40=1242.61