Question

A company issued 5%, 20-year bonds with a face amount of $60 million. The market yield for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price did the bonds sell? (

Answer 1

Total $53.0656 (millions)

Step-by-step explanation:

We will need to add the present value of the coupon payment

and the present value of the maturity date

present value of the annuity:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C= 60 million x 5% /2 1.5

time= 20 years 2 payment per year = 40

rate = 6% annual = 0.06/2 = 0.03 semiannually

`1.5 * (1-(1+0.03)^(-40) )/(0.03) = PV\\`

PV $34.6722

present value of the bonds:

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 60

time 40

rate 0.03

`(60)/((1 + 0.03)^(40) ) = PV`

PV $18.3934

The value of the bond will be the sum of both

PV c $34.6722

PV m $18.3934

Total $53.0656