Final answer:
To calculate the value of a 10.71% coupon bond with a 6-year maturity from West Bank, first calculate the semi-annual coupon payment, then find the present value of these payments and the face value at the required rate of return of 3.35% to get the current bond value.
Step-by-step explanation:
The question is regarding the calculation of the present value of a bond given a certain required rate of return. West Bank (a bank holding company) issues a 10.71% coupon bond with a maturity of 6 years which makes semi-annual interest payments. The face value of the bond, payable at maturity, is $1,000. To find the value of this bond if your required rate of return is 3.35%, we must calculate the present value of the semi-annual interest payments as well as the present value of the face value of the bond using the given rate of return as the discount rate.
Firstly, we calculate the semi-annual coupon payment by taking the annual coupon rate (10.71%) and dividing it by two, then multiplying by the face value ($1,000). This gives us $53.55 as the semi-annual coupon payment. Next, since the bond makes interest payments semi-annually for 6 years, there are 12 periods in total. The semi-annual required rate of return is half of 3.35%, which is 1.675%.To calculate the present value of the interest payments, we use the formula for the present value of an annuity. The present value of the face value is calculated by discounting the $1,000 face value back 12 periods at the semi-annual rate. The sum of these two present value calculations will give us the total present value of the bond, which is the bond's current value.