Question

Flora Co.'s bonds, maturing in 19 years, pay 5 percent interest on a $1,000 face value. However, interest is paid

semiannually. If your required rate of return is 14 percent, what is the value of the bond? How would your answer change if the
interest were paid annually?
a. If the interest is paid semiannually, the value of the bond is $(Round to the nearest cent.)

Answer 1

The value of the bond is $851.09.

Step-by-step explanation:

To calculate the value of the bond, we need to find the present value of each cash flow. In this case, the bond pays semiannual interest, so we will have 38 cash flows over the 19-year period. The formula to calculate the present value of each cash flow is:

PV = C / (1 + r)^n

Where PV is the present value, C is the cash flow, r is the required rate of return, and n is the number of periods. For this bond, the cash flow is $50 (5% of $1,000), the required rate of return is 14%, and the number of periods is 38. Calculating the present value of each cash flow and summing them up, we get the value of the bond to be $851.09.