Question

Kebt Corporation's Class Semi bonds have a 12-year maturity and an 8.75% coupon paid semiannually (4.375% each 6 months), and those bonds sell at their $1,000 par value. The firm's Class Ann bonds have the same risk, maturity, nominal interest rate, and par value, but these bonds pay interest annually. Neither bond is callable. At what price should the annual payment bond sell? $937.56 $961.60 $986.25 $1,010.91 $1,036.18

Answer 1

Answer: $986.25

Explanation:

Answer 2

Answer:

Total $986.2534

Explanation:

We have to discount the annual bond against the same rate but compounding semiannualy

$(1+ 0.0875/2)^2 -1 = r_e\\1.0894140625 - 1 = r_e\\0.0894140625 = r_e$

Now we discount the 12 coupon payment and the maturity at the given discount rate

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

C 87.500 (1,000 x 0.0875)

time 12

rate 0.0894140625

$87.5 \times \frac{1-(1+0.0894140625)^{-12} }{0.0894140625} = PV$

PV $628.4172

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

Maturity   1,000.00

time   12.00

rate  0.0894140625

$\frac{1000}{(1 + 0.0894140625)^{12} } = PV$  

PV   357.84

PV c $628.4172

PV m  $357.8362

Total $986.2534