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SashulF [63]
3 years ago
6

A company has an 8% bond that has a face value of $1,000 and matures in 30 years. Assume that coupon payments are made semi-annu

ally. The bonds are callable after 15 years at 108% of par value. What is the value of the bond if rates drop immediately to 6%?a. $1,277b. $2,192c. $1,452d. $1,229e. $602
Business
1 answer:
NemiM [27]3 years ago
6 0

Answer:

a) 1,277 dollars

Explanation:

We have to solve for the present value of the coupon payment and maturity art the end of the bond life discounted at 6% annual rate:

Coupon payment

C \times \frac{1-(1+r)^{-time} }{rate} = PV\\  

Coupon payment: 1,000 x 8% / 2 = 40

time 30 years x 2 = 60

market rate = 6% / 2 = 0.03

40 \times \frac{1-(1+0.03)^{-60} }{0.03} = PV\\  

PV $1,107.0225  

Maturity

\frac{Maturity}{(1 + rate)^{time} } = PV  

Maturity   1,000.00  

time   60.00  

rate  0.03

\frac{1000}{(1 + 0.03)^{60} } = PV  

PV   169.73  

 

PV coupon  $1,107.0225  

PV maturity  <u>$   169.7331  </u>  

Total          $1,276.7556  

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