Bob is evaluating a bond issue to determine the right price for the bond. In his evaluation, he gathers the following informatio
n:
N = 8 years INT = .025 or 2.5% PMT = $25 FV = $1,000 (par value)
What is the above bond issue worth in today's dollars?
a. $1,000
b. $1,181.63
c. $1,200.50
d. None of the above
N = 8 years INT = .025 or 2.5% PMT = $25 FV = $1,000 (par value)
What is the above bond issue worth in today's dollars?
a. $1,000
b. $1,181.63
c. $1,200.50
d. None of the above
1 answer:
Answer:
The price of the bond is $1000. Thus, option a is the correct answer.
Explanation:
The price of a bond is calculated using the present value of the interest payments made by the bond, which is in the form of an annuity, plus the present value of the face value of the bond. The present value is calculated by discounting the annuity of interest and the face value by the YTM or yield to maturity. In case YTM is not provided, we assume that it is same as or equal to the coupon rate paid by the bond.
The formula for the price of the bond is attached.
Bond Price = 25 * [(1 - (1+0.025)^-8) / 0.025] + 1000 / (1+0.025)^8
Bond Price = $1000
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Answer:
The correct answer for 1st option is $158,206.95 and for 2nd option is $157,733.11.
Explanation:
According to the scenario, the given data are as follows:
1st option
Payment ( PMT ) = $85,000
Interest rate (I) = 7%
Time (N) = 2 years
So, the effective rate of interest can be calculated as :
R =
R = 7.2290%
Present value can be calculated by using following formula:
P = PMT x (((1-(1 + r) ^- n)) / i)
Hence, present value of 1st option can be calculated as:
PV = 85000×((1-(1 + 7.229%) ^- 2) / 7%)
PV = $158,206.95
Now, present value of 2nd option can be calculated as:
Payment = $74,000
Bonus = $20,000
So, PV = 74000×((1-(1 + 7.229%) ^- 2) / 7%)
PV = 137,733.11
Bonus (add) = $20,000
Total PV = $157,733.11
Hence, the present value for 1st option is $158,206.95 and for 2nd option is $157,733.11.