Question

RJR Nabisco recently experienced a market reevaluation due to a number of tobacco lawsuits. The firm has a bond outstanding with 15 years to maturity, and a coupon rate of 8%, with interest being paid semiannually. The required yield to maturity has risen to 16%. What is the price of the RJR Nabisco bond?

Answer 1

Answer: The current price of the bond is $258.74

Explanation:

The present value of the bond is its Current Price

We would use the following formua to calculate the Current Price of the bond,

PV = $\frac{FV}{(1+r)^{N} }$ + A $[\frac{1-\frac{1}{(1+r)^{N} } }{r} ]$

Where,

FV = Face value =  $1,000

A = Coupon payment paid semi annually = (8% x 1000) / 2 = $40

r = Yield to Maturity = 16%

N = Number of periods = 15 years x 2 = 30 semi-annual periods

PV = $\frac{1000}{(1+0.16)^{30} }$ + 40 $[\frac{1-\frac{1}{(1+0.16)^{30} } }{0.16} ]$

PV = 258.73618