Question

Sheridan Real Estate Company management is planning to fund a development project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding, what will be the price of these bonds if the appropriate discount rate is 14.6 percent? (Round answer to 2 decimal places, e.g. 15.25.)

Price of the bond

$

Linda Williams wants to invest in four-year bonds that are currently priced at $875.32. These bonds have a coupon rate of 6.4 percent and make semiannual coupon payments. What is the current market yield on this bond? (Round intermediate calculations to 5 decimal places, e.g. 1.25145 and final answer to 2 decimal places, e.g. 15.25%.)

Current market yield

%

Answer 1

Solution to the FIRST QUESTION

Issue Price of the Zero-Coupon Bond

Par Value / Face Value of the Bond = $1,000

Semi-annual Yield to Maturity (YTM) = 7.30% [14.60% x ½]

Time to Maturity/Maturity Period (n) = 10 Years [10 Years x 2]

Therefore, the Selling price of the Zero-Coupon Bond = Par Value / (1 + YTM)n

= $1,000 / (1 + 0.0730)20

= $1,000 / (1.0730)20

= $1,000 / 4.092554196

= $244.35

“Hence, the Price of the bond will be $244.35”

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