Question

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 6.20%, based on semiannual compounding. What is the bond's price?

Answer 1

Answer:

Value of bond = $1,101.59

Explanation:

We know,

Value of bond = [I × $\frac{1 - (1+r)^{-n}}{r}$] + $\frac{FV}{(1+r)^{n}}$

Given,

Face value (FV) = $1,000.

Semiannual Coupon, I = FV x semiannual coupon rate = $(1,000 × 7.25%) ÷ 2 = 72.5 ÷ 2 = $36.25

Interest rate, r = 6.20% ÷ 2 = 3.10% = 0.031

Maturity, n = 15 years = 30 periods (As it is semi annual).

Therefore,

Value of bond = [$36.25 × $\frac{1 - (1 + 0.031)^{-30}}{0.031}$] + ($1,000 ÷ $1.031^{30}$)

or, value of bond = ($36.25 × 19.3495) + $400.17

value of bond = $701.42 + $400.17

value of bond = $1,101.59