Question

Within Year, Inc. has bonds outstanding with a $1,000 par value and a maturity of 19 years. The bonds have an annual coupon rate of 15.0% with semi-annual coupon payments. You would expect a quoted annual return of 16.0% if you purchased these bonds. What are the bonds worth to you

Answer 1

Answer: $940.86

Explanation:

Coupon payment = Face value * Coupon rate * 1/2 years = $75

Number of periods = 19 years * 2 = 38 semi annual periods

Rate = 16.0%/2 = 8%

Price of a bond is calculated as;

$= Coupon payment * \frac{1 - ( 1 + rate)^{-n} }{r} + \frac{Par value}{(1 + r)^{n} } \\\\= 75 * \frac{1 - ( 1 + 0.08)^{-38} }{0.08} + \frac{1,000}{(1 + 0.08)^{38} }\\\\= 940.855655$

= $940.86