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Homework answers / question archive / How much should a $1,000-face-value bonds sell for, assuming the following conditions: The bond pays a coupon of 11% The coupon payments are paid annually
How much should a $1,000-face-value bonds sell for, assuming the following conditions:
The bond pays a coupon of 11%
The coupon payments are paid annually.
The required rate of return on similar-risk investments is 9%.
The bond matures in 15 years
How much should a $1,000-face-value bonds sell for, assuming the following conditions:
The bond pays a coupon of 7%
The coupon payments are paid semi-annually.
The required rate of return on similar-risk investments is 7%.
The bond matures in 10 years
1. First, we need to calculate how much the bonds have been issued by using the formula as follows:
where B is the issued price
C is the coupon payment
r is the effective rate
n is the period
However, in order to calculate the price of the bond, we need to use the required rate of return on similar-risk investments as the effective rate to discount the coupon payments and face value to be received in the future. As the payment is annual, the effective rate used is equal to 9%. The period is equal to 15. Coupon payment is equal to $1,000 x 11% = 110)
- View the attachment for the calculation.
2. As the payment is semi-annual, the effective rate used must be divide by 2, that is equal to 3.5%. The period must also multiply by 2, that is equal to 20. Coupon payment must also be paid as semi-annual, that is divided by 2 (1,000 x 7% x 6/12 = 35)
Note: If the required rate of return on similar-risk investments and coupon rate is the same, then the bond is sold at par value.
view the attachmant for the calculation.
