Question

Ingersoll Company has a bond currently outstanding. The bond has a face value of $1,000 and matures in 10 years. The bond makes no coupon payments for the first three years, then pays $45 every six months over the subsequent four years, and finally pays $100 every six months over the last three years. If the required return on these bonds is 5.8% percent compounded semiannually, what is the current price of the bond

Answer 1

$1,196.01

Step-by-step explanation:

What is the current price of the bond

Face value of Bond = $1000

Term (maturity time) = 10 years

periods = 10 *2 = 20 ( semiannual compound of interest )

Yield = 5.8%. semiannual yield = 5.8% / 2 = 2.9% = 0.029

Next : calculate the value of bond using the relationship below

Discounting factor = 1/(1 + r)^n

n = number of payments

note : payments are made semiannually

attached below is a Table showing the discounting factor and present value starting from the 4th year ( Biannually )i.e. when payment commenced

payments discounting factor present value

45 0.818638898 36.83875

45 0.795567442 35.800535

45 0.773146203 34.791579

45 0.751356854 33.811058

45 0.730181588 32.858171

45 0.709603098 31.932139

45 0.689604566 31.032205

45 0.670169646 30.157634

100 0.651282455 65.128245

100 0.632927556 63.292756

100 0.615089947 61.508995

100 0.597755051 59.775505

100 0.580908698 58.09087

100 0.564537122 56.453712

1000 0.564537122 564.53712

Total of present value = 1196.0093