Question

Potter industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. the par value of the bond is $1,000. if the going annual interest rate is 8.6%, what is the value of the bond? round your answer to the nearest cent. do not round intermediate calculations.

Answer 1

Answer:

The value of the bond which is the current price is $ 830.16  

Explanation:

It is very vital to note that a rational investor values a bond today based on  the cash flows payable by the bonds in future discounted to today's terms.            

The future cash flows comprise of the yearly coupon interest of $60(6% *$1000) for 10 years as well as the repayment of the principal $1000 at the end of year 10              

To bring the cash inflows today's term, we multiply them them by the discounting factor 1/(1+r)^N , where is the yield to maturity,r is  8.6% and N is the relevant the cash flow is received.              

The discounting is done in attached spreadsheet leading to $ 830.16   present  value today.

It is expected that the bond would be issued at discount as yield to maturity is higher than annual interest.      

Download xlsx

Answer 2

Answer:

$ 830.16 approximately to the nearest cent

Explanation:

Bond valuation is a technique for determining the theoretical fair value of a particular bond. Bond valuation includes calculating the present value of a bond's future interest payments, also known as its cash flow, and the bond's value upon maturity, also known as its face value or par value.

The attached sheets shows the bond value of Potter Industries at 10 years maturity.