Question

D. J. Masson Inc. recently issued noncallable bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell

Answer 1

Answer:

$894.65

Explanation:

Given data:

n= time = 10 years

par value= $1000

annual coupon = 5.5%

interest rate = 7.0%

bond price = present value of interest + present value of redemption value.

present value of interest:

C = 5.5% of 1000 = $55

PV = C x (1 - (1 + r)^(-n)/r

PV = 55 x 1.07^(-10)/0.07

PV = 386.3

present value of redemption value:

pv = f / (1 + r)^(n)

where f = par value

PV = 1000 / (1.07)^(10)

PV = 508.35

summing up both values

508.35 + 386.3

= $894.65

Answer 2

The bond should be sold at $894.65

• The calculation is as follows:

bond price = present value of interest + present value of redemption value.

present value of interest:

C = 5.5% of 1000 = $55

PV = C ×  (1 - (1 + r)^(-n) ÷ r

= 55 × 1.07^(-10) ÷ 0.07

= 386.3

Now

present value of redemption value:

pv = f ÷ (1 + r)^(n)

PV = 1000 ÷ (1.07)^(10)

PV = 508.35

Now finally

= 508.35 + 386.3

= $894.65

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