Carter & Carter is considering setting up a regional lockbox system to speed up collections. The company sells to customers
1 answer:
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Answer:
Price of the bond is $104,236,860.
Explanation:
Given:
Coupon rate is 6% or 0.06
Face value = $119,000,000
Coupon payment each year = 0.06×119,000,000
= $7,140,000
Yield to maturity = 7% or 0.007
Maturity period = 30 years
Price of bond = Present value of face value + present value of coupon payment (annuity)
Price of bond =
PV of $1 for 7%,30 periods = 0.1314
PVA of $1 for 7%,30 periods = 12.409
Substitute the values in above formula:
Price of bond = (119,000,000 × 0.1314) + (7,140,000 × 12.409)
= 15,636,600 + 88,600,260
= $104,236,860
There will be slight difference in final answer as present value table is used. Excel spreadsheet gives an accurate answer.
So, price of bond is $104,236,860