Quantitative Problem: Potter Industries has a bond issue outstanding with an ann
ID: 2775264 • 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 8.4%, 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 8.4%, what is the value of the bond? Round your answer to the nearest cent. Do not round intermediate calculations. $
Explanation / Answer
Solution for the First Question
Face Value of the Bond : $1000
Coupon Rate : 6%
On going Interest Rate : 8.4%(Market rate)
Period of the Bond : 10 years
Formula for Bond Valuation : Cumulative PV of Interest Payment+PV of the face value at the 10th year
The discount rate should be the 8.4%(market rate)
So the cumulative PV at 8.4% for 10 years will be : 6.5907
PV for 10 th year at 8.4% will be 0.4464
The value of the bond will be ($60*6.5907)+($1000*.4464) = $841.84
Solution for Question 2
Formula is the same as above
Since payments are made half yearly, the following needs to be considered.
Number of years / payments = 10*2 = 20
Coupon Rate = 6% * 6/12 =3%
Half yearly interest payment = $1000*3% = $30
Discount rate : 8.4 / 2 = 4.2%
Cuulative PV for interest payment = 30*13.3527( PVF for 20 years at 4.2%) = $400.581
PV of the face value at 20th year / payment = $1000 * .4392 = $439.2
Value of the bond = $400.581+$439.2 = $839.78.
Thanks