El Sol Inc. is offering its bonds on the market at 8% annual interest but ensures...
El Sol Inc. is offering its bonds on the market at 8% annual interest but ensures that they are paid semi-annually for 7 years. The prevailing market interest rate is currently 10%. What is the value of the bonds?
Present value $ ____________ is sold with a premium or discount
______________
Please show the formula and how to calculate the Present value and
premium or discoun!!
Homework Answers
The Present Value of the Bond
· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
· Here, the calculation of the Bond Price using financial calculator is as follows
|
Variables |
Financial Calculator Keys |
Figures |
|
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
|
Coupon Amount [$1,000 x 8.00% x ½] |
PMT |
40 |
|
Market Interest Rate or Yield to maturity on the Bond [10.00% x ½] |
1/Y |
5.00 |
|
Maturity Period/Time to Maturity [7 Years x 2] |
N |
14 |
|
Bond Price/Current market price of the Bond |
PV |
? |
Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $901.01
The Present Value of the Bond is $901.01
The Discount on the Bond
The Discount on the Bond = Face Value of the Bond – The Present Value of the Bond
= $1,000 - $901.01
= $98.99
Therefore, the Present value of the Bond is $901.01 and the Discount on the Bond is $98.99
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