Quantitative Problem: Potter Industries has a bond issue outstanding with an ann
ID: 2648930 • Letter: Q
Question
Quantitative Problem: Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 7.2%, what is the value of the bond? Round your answer to the nearest cent. Do not round intermediate calculations.
Quantitative Problem: Potter Industries has a bond issue outstanding with a 6% coupon rate with semiannual payments of $30, and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 7.2%, what is the value of the bond? Round your answer to the nearest cent. Do not round intermediate calculations.
Explanation / Answer
Coupon rate of the bond = 6%
Par value = $1,000. So, 6% of 1,000 will be paid as annual interest = $60
Maturity value = $1,000 at the end of 10 years.
Value of the bond = present value of annual coupon payments for the period year 1 to year 10 and present value of $1,000 (maturity value) at 10th year. Discount rate will be 7.2%
PV of interest rates = 60/(1.072^1)+60/(1.072^2)...........+60/(1.072^10) = $417.54
pv of maturity value of the bond = 1000/(1.072^10) = $498.94
Value of the bond = pv of interests+pv of maturity value
= 417.54+498.94 = $916.49
(2) value of the bond if semi annual payments
Thus value of bond = 424.93+498.94 = $923.87
Year Interest Maturity value Discount factor PV of interest PV of maturity 0.5 30 1.072 28.97503 1 30 27.98507 1.5 30 27.02894 2 30 26.10548 2.5 30 25.21357 3 30 24.35213 3.5 30 23.52012 4 30 22.71654 4.5 30 21.94041 5 30 21.1908 5.5 30 20.4668 6 30 19.76754 6.5 30 19.09216 7 30 18.43987 7.5 30 17.80985 8 30 17.20137 8.5 30 16.61367 9 30 16.04605 9.5 30 15.49783 10 30 1000 14.96833 498.9444 Total 424.9315 498.9444