Question

Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 8 percent and the interest is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 10 years to maturity.Required:Compute the price of the bonds based on semiannual analysis.

Answer 1

Answer:

Price of bond   = $770.60

Explanation:

The value of the bond is the present value(PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).

Value of Bond = PV of interest + PV of RV

The value of bond for Heather Smith  can be worked out as follows:

Step 1  

PV of interest payments

Semi annul interest payment  

= 8%× 1000 × 1/2 =40

Semi-annual yield = 12/2 = 6% per six months

Total period to maturity (in months)  = (2 ×10) = 20 periods

PV of interest =  

40 × (1- (1+0.06)^(-20)/0.06)  = 458.796

Step 2  

PV of Redemption Value

= 1,000 × (1.06)^(-20)  = 311.80

Step 3 :Price of bond  

= 458.796  + 311.80 = 770.60

Price of bond   = $770.60