Question

Ingersoll Company has a bond currently outstanding. The bond has a face value of $1,000 and matures in 10 years. The bond makes no coupon payments for the first three years, then pays $45 every six months over the subsequent four years, and finally pays $100 every six months over the last three years. If the required return on these bonds is 5.8% percent compounded semiannually, what is the current price of the bond

Answer 1

Answer:

$1,196.01

Explanation:

What is the current price of the bond

Face value of Bond = $1000

Term (maturity time) = 10 years

periods = 10 *2 = 20 ( semiannual compound of interest )

Yield = 5.8%.  semiannual yield = 5.8% / 2 = 2.9% = 0.029

Next : calculate the value of bond using the relationship below

Discounting factor = 1/(1 + r)^n

n = number of payments

note : payments are made semiannually

attached below is a Table showing the discounting factor and present  value starting from the 4th year ( Biannually )i.e. when payment commenced

payments      discounting factor                present value

45                  0.818638898                 36.83875

45                  0.795567442                35.800535

45                  0.773146203                         34.791579

45                  0.751356854                        33.811058

45                  0.730181588                        32.858171

45                  0.709603098                31.932139

45                  0.689604566                31.032205

45                  0.670169646                 30.157634

100                  0.651282455                 65.128245

100                   0.632927556                 63.292756

100                  0.615089947                 61.508995

100                   0.597755051                 59.775505

100                   0.580908698                 58.09087

100                   0.564537122                 56.453712

1000                   0.564537122                564.53712

                                   

Total of present value  =  1196.0093