Question

On September 30, 2021, the San Fillipo Corporation issued 8% stated rate bonds with a face amount of $300 million. The bonds mature on September 30, 2041 (20 years). The market rate of interest for similar bonds was 10%. Interest is paid semiannually on March 31 and September 30.Required:Determine the price of the bonds on September 30, 2021.

Answer 1

Answer:

Bond Price = $248.5227409 million rounded off to $248.523 million

Explanation:

To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,

Coupon Payment (C) = 300 * 0.08 * 6/12 = 12 million

Total periods (n) = 20 * 2 = 40

r or YTM = 0.10 * 6/12 = 0.05 or 5%

The formula to calculate the price of the bonds today is attached.

Bond Price = 12 * [( 1 - (1+0.05)^-40) / 0.05]  +  300 / (1+0.05)^40

Bond Price = $248.5227409 million rounded off to $248.523 million