Final answer:
A bond is a financial asset that represents a loan agreement between a borrower and an investor. Its value is influenced by factors such as its face value, coupon rate, and market interest rates. When interest rates rise, the value of a bond decreases, while when interest rates fall, the value of a bond increases. In the case of Potter Industries' bond, the value can be calculated using the bond valuation formula with adjusted inputs for semiannual payments.
Step-by-step explanation:
A bond is a financial asset that represents an agreement between a borrower and an investor. It has a face value, which is the amount that the borrower agrees to repay to the investor at maturity, and a coupon rate or interest rate, which is the rate at which the borrower pays interest on the bond. The value of a bond is determined by its present value, which is the most that a buyer would be willing to pay for the bond. This value is influenced by various factors, including the bond's face value, interest rate, and market interest rates.
When interest rates rise, the value of an existing bond decreases because the fixed coupon rate becomes less attractive compared to the higher market interest rates. On the other hand, when interest rates fall, the value of an existing bond increases because the fixed coupon rate becomes more attractive than the lower market interest rates. A bond that sells below its par value is called a discount bond, and its value tends to increase over time towards its par value at maturity. Conversely, a bond that sells above its par value is called a premium bond, and its value tends to decrease over time towards its par value at maturity.
In the case of Potter Industries' bond, we can calculate its value by using the bond valuation formula. The bond has a 6% coupon rate with semiannual payments of $30, a 10-year maturity, and a par value of $1,000. The going annual interest rate is 7.4%. To calculate the bond's value, we need to adjust the inputs for the semiannual payments. We multiply the number of years to maturity by 2, divide the going annual interest rate by 2 for the periodic going rate of interest, and divide the annual interest payment by 2 for the periodic interest payment. Using a financial calculator, we can now input the adjusted values and solve for the present value of the bond, which, in this case, is $844.16.