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7.3

Quantitative Problem: Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The

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Answer #1

1)

Coupon = 6% of 1000 = 60

Value of bond = Coupon * [1 - 1 / (1 + r)n] / r + FV / (1 + r)n

Value of bond = 60 * [1 - 1 / (1 + 0.078)10] / 0.078 + 1000 / (1 + 0.078)10

Value of bond = 60 * [1 - 0.471859] / 0.078 + 471.859161

Value of bond = 60 * 6.771038 + 471.859161

Value of bond = $878.12

2)

Number of periods = 10 * 2 = 20

Rate = 7.8% / 2 = 3.9%

Value of bond = Coupon * [1 - 1 / (1 + r)n] / r + FV / (1 + r)n

Value of bond = 30 * [1 - 1 / (1 + 0.039)20] / 0.039 + 1000 / (1 + 0.039)20

Value of bond = 30 * [1 - 0.465253] / 0.039 + 465.252857

Value of bond = 30 * 13.711465 + 465.252857

Value of bond = $876.60

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