Question

Six years ago, James Corporation sold a $100 million bond issue to expand its facilities. Each debenture has a $1,000 par value, an original maturity of 20 years (there are now 14 years left to maturity), and an annual coupon rate of 11.5% with semiannual payments. If you require a 14% return, what price would you pay today for a James bond?
a) $826
b) $833
c) $848
e) $890
d) $868

Answer 1

Answer:

present value = $848.29

so correct option is c) $848

Explanation:

given data

bond sold = $100 million

time = 6 year

future value = $1,000 par value

original maturity = 20 years

years to maturity left = 14 years

annual coupon rate = 11.5%

require return = 14%

to find out

what price would you pay today for a James bond

solution

we get here first interest amount that is

interest = future value × annual coupon rate  × 0.5

interest = 1000 × 11.5% × 0.5

interest = $57.50

and rate = $\frac{0.14}{2}$

rate = 7%

now we find present value by

PV(Rate,nper, pmt, FV)

PV ( 7%, 28, 57.50,1000)

present value = $848.29

so correct option is c) $848