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sweet [91]
3 years ago
10

Stech Co. is issuing $9 million 12% bonds in a private placement on July 1, 2017. Each $1,000 bond pays interest semi-annually o

n December 31 and June 30 of each year. The bonds mature in ten years. At the time of issuance, the market interest rate for similar types of bonds was 8%. What is the expected selling price of the bonds
Business
1 answer:
STALIN [3.7K]3 years ago
5 0

Answer:

Expected selling price =$ 1,271.81

Explanation:

<em>The price of a bond is the present value (PV) of the future cash inflows expected from the bond discounted using the yield to maturity.</em>

<em>These cash flows include interest payment and redemption value</em>

The price of the bond can be calculated as follows:

Step 1

<em>PV of interest payment</em>

coupon rate - 12%, yield - 8%, years to maturity- 10 years

Semi-annual coupon rate = 12%/2 = 6%

Semi-annual Interest payment =( 6%×$1000)= $60

Semi annual yield = 8%/2 = 4%

PV of interest payment

= A ×(1- (1+r)^(-n))/r

A- interest payment, r- yield - 4%, n- no of periods- 2 × 10 = 20periods

= 60× (1-(1.04)^(-10×2))/0.04)

= 60× 13.59032634

=$815.41

Step 2

<em>PV of redemption value (RV)</em>

PV = RV × (1+r)^(-n)

RV - redemption value- $1000, n- 2×10 r- 4%

= 1,000 × (1+0.04)^(-2×10)

= $456.38

Step 3

<em>Price of bond = PV of interest payment + PV of RV</em>

= $815.41 + $456.38

= $ 1,271.81

Expected selling price =$ 1,271.81

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