Question

Umbarra Company bonds have a stated coupon rate of 5% and pay interest on an annual basis. They mature in 18 years and have a par value of $1,000. The market rate of interest on similar debt is 8%. The value of Umbarra bonds is (round to the nearest dollar).

Answer 1

Value of Bond =$718.8

Step-by-step explanation:

The value of the bond is the present value(PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV) discounted at the yield rate

Value of Bond = PV of interest + PV of RV

The PV of interest payment

A ×(1- (1+r)^(-n))/r

Interest payment = 5%× 1000 = 50

PV = 50× (1- 1.08^(-18))/0.08 = 468.59

PV of redemption value

PV = RV× (1+r)^(-n)

PV = 1000× 1.18^(-18) = 250.24

The value of bond = 468.59 + 250.24= 718.84

The value of Bond = $718.84