Question

LLY Corporation is planning to issue a $1,000 face value bond with a maturity of 30 years. The annual coupon rate is expected to be 7.25% and interest payments are expected to be paid semi-annually. If the market is requiring a return of 10% annually on similar bonds, then what should LLY expect to receive for each bond they issue? Round to the nearest cent. Do not a dollar sign in your answer. (i.e. If your answer is $432.51, then type 432.51 without $ sign)

Answer 1

Answer:

$739.72 ≈  739.72

Explanation:

we can use an excel spreadsheet and the present value function to calculate the expected price of each bond ⇒ =PV(rate,nper,pmt,fv,[type])

• fv = $1,000
• pmt = $1,000 x 7.25% x 1/2 = $36.25
• nper = 60
• rate = 10% / 2 = 5%
• present value = ?

=PV(5%,60,36.25,1000) = -739.72 since excel calculates the initial investment, it is always negative, so we just change the sign.