Question

$250 million bond issue to finance the purchase of new jet airliners. These bonds were issued in $1000 denominations with an original maturity of 12 years and a coupon rate of 12%. Determine the value today of one of these bonds to an investor who requires a 14% rate of return on these securities.

Answer 1

$886.78

Step-by-step explanation:

Data provided in the question:

Amount of bond issued = $250 million

Coupon rate = 12%

Face value, FV = $1,000

Coupon value, C = 12% of $1,000 = $120

Duration = 12 years

Required rate of return = 14%

Price of a bond =
`C(1-(1+r)^(-n))/(i)+(FV)/((1+i)^n)`

on substituting the respective values, we get

Price of a bond =
`\$120*(1-(1+0.14)^(-12))/(0.14)+(\$1000)/((1+0.14)^(12))`

or

Price of bond = 679.23 + 207.55 = $886.78