Borrower, Inc., issued $500,000, 7%, semiannual coupon bonds on April 6, 2010. The bonds mature on April 6, 2035. The bonds were issued with a yield-to-maturity of 5%. All rates are APR's with semiannual compounding. Required: At what price would the bonds sell on April 6, 2020, if the market rate of interest for similar bonds was 4%?

Question

Rainbow

Business

13 January, 07:17

Borrower, Inc., issued $500,000, 7%, semiannual coupon bonds on April 6, 2010. The bonds mature on April 6, 2035. The bonds were issued with a yield-to-maturity of 5%. All rates are APR's with semiannual compounding. Required: At what price would the bonds sell on April 6, 2020, if the market rate of interest for similar bonds was 4%?

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Answers (1)

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Fisher Blake · Answer 1

The bond should sell for $ 667,973.42 at April 6,2020

Explanation:

Note that at April 6,2020, the bond has 15 years to maturity.

The price of the bond issue van be computed using the rate formula in excel, which is given as = -pv (rate, nper, pmt, fv)

rate is the yield to maturity of 4% divided by 2, that is 2.00% (2 implies semi-annual interest)

nper is the number of coupon interest payable by the bond which 15years multiplied by 2=30

pmt is the semi-annual interest = $500,000*7%*6/12=$17,500

fv is the face value of $500,000

=-pv (2%,30,17500,500000)

=$667,973.42