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pychu [463]
3 years ago
9

The Bradford Company issued 10% bonds, dated January 1, with a face amount of $80 million on January 1, 2021. The bonds mature o

n December 31, 2030 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.
Business
1 answer:
DIA [1.3K]3 years ago
5 0

Answer:

I strongly believe that the requirement is to calculate the price of the bond.

The bond is worth $ 70,824,063.03  

Explanation:

It is noteworthy that a rational would-be investor would pay for a bond a price that reflects the cash flows receivable from the bonds in future discounted to today's terms.              

The future cash flows comprise of the semi-annual coupon interest of $4 million(10%/2 *$80 million) for 20 periods as well as the repayment of the principal $80 million at the end of period 20

Since coupon is paid every six months, the coupon would be twenty times over the life of the bond(paid twice a year for 10 years)        

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 of 12% and N is the relevant the cash flow is received.          

The discounting is done in attached spreadsheet leading $ 70,824,063.03 present value today.        

Download xlsx
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