Question

3. Tennessee Jed Co. (TJC) bonds mature in 9 years and pay an annual coupon of 8%. They have a face value of $1,000. a. If the required return b investors is 8%, will these bonds sell at face, at a premium, or at a discount? b. Compute the value of a TJC bond if investors' required return is 10%. c. Value this same TJC bond but with semi-annual coupon payments.

Answer 1

3]
a]	If the required return is 8%, the bond will sell at
	face value, as the coupon rate equals the required
	return.
b]	Value of a bond is the PV of the expected cash flows
	when discounted at 10% [the required rate].
	The expected cash flows are the maturity value of
	$1000 and the annual interest of 80.
	Value of the bond = 1000/1.1^9+80*(1.1^9-1)/(0.1*1.1^9) =	$             884.82
c]	The discounting is to be done halfyearly and the required
	return for the half year would be 5%, n = 18 half years & half yearly
	interest would be $40.
	Value of the bond = 1000/1.05^18+40*(1.05^18-1)/(0.05*1.05^18) =	$             883.10