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25 October, 08:37

Cullumber, Inc., has outstanding bonds that will mature in six years and pay an 8 percent coupon semiannually. If you paid $1,033.85 today and your required rate of return was 6.6 percent.

A. How much should you have paid for the bond? B. Worth of the bond is?

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  1. 25 October, 09:05
    0
    The worth of the bond is $1068.44

    Explanation:

    Solution

    Given that

    Supposed that the face of the bond is $1000

    Thus

    The semiannual coupon payment = 1000*8%*6/12

    = 40 (semiannual period in a year comprising of 6 months each)

    Then

    Semiannual periods = 6 years * 2

    =12

    The semiannual yield = 6.6*6/12

    = 3.3%

    So,

    The present value of bond = (PVA3.3%,12*semiannual coupon payment) + (PVF3.3%,12*Face value)

    = (9.77808*40) + (.67732*1000)

    =391.12 + 677.32

    =$1068.44

    The worth of the bond is $1068.44

    nnote: Find present value factor using the formula 1 / (1+i) ^n

    (Where i = 3.3%, n = 12) or using financial calculator by putting i = 3.3%, n=12 and FV = 1

    Also, Find present value annuity factor using the formula [1 / (1+i) ^1 + 1 / (1+i) ^2 + ... + (1+i) ^11+1 / (1+i) ^12 ] or using financial calculator where i = 3.3%, n = 12 and PMT = 1
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