Question

The Bradford Company issued 10% bonds, dated January 1, with a face amount of $80 million on January 1, 2018 to Saxton-Bose Corporation. The bonds mature on December 31, 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. Determine the price of the bonds at Janary 1 2018.

Answer 1

The price of the bonds at Janary 1 2018 is $70,824,063

Step-by-step explanation:

Data:

Face Amount = F = $80,000,000

Time = n = 10 years * 2 (semiannually) = 20 semesters

Yield = r = 12% / 2 (semiannually) = 6% = 0.06

Payment = C = $80,000,000 * 10% / 2 = $4,000,000

Computation:

Bond Price = (C * (1 - (1 + r)^-n) / r) + (F / (1 + r)^n)

Bond Price = ($4,000,000 * (1 - (1 + 0.06)^-20) / 0.06) + ($80,000,000 / (1 + 0.06)^20)

Bond Price = ($4,000,000 * 11.46992) + $24,944,378.15089

Bond Price = $45,879,684.87426 + $24,944,378.15089

Bond Price = $70,824,063

Hope this helps!