Question

Nunavet Ocean Cruises sold an issue of 12-year ​$1,000 par bonds to build new ships. The bonds pay​ 4.85% interest, semi-annually.​ Today's required rate of return is​ 9.7%. How much should these bonds sell for​ today? Round off to the nearest​ $1.

Answer 1

Answer:

bond market value $660

Explanation:

We need to calculate the present value of the maturity and the cuopon payment using the effective rate of 9.7%

First we do the annuity:

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

C  24.25  (1,000 face value x 4.85 bond rate / 2 )

time  24.00 (12 year 2 payment a year)

rate  0.04850 (current rate divide by 2 to get it annually)

$24.25 \times \frac{1-(1+0.0485)^{-24} }{0.0485} = PV$

PV $339.55

Then present value of the maturity

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

Maturity   1,000.00 the face value of the bond

time   24.00

rate   0.04850

$\frac{1000}{(1 + 0.0485)^{24} } = PV$  

PV   320.89

Finally we add them together:

PV coupon payment $339.5545

PV maturity  $320.8910

Total $660.4455

rounding to nearest dollar

bond market value $660