Question

Twenty years-ago Goran Corp. issued 30-year bonds with a face value of $1,000. The coupon rate on these bonds is 8 percent paid semiannually. A current bondholder is considering selling the bond today. The market rate is now 12 percent. Required: a) Determine the price of the bond today. Show all computations. b) Explain why the amount you determined in part (a) is different from the par value of the bond. The amount determined in part (a) is different from the par value of the bond because the Yield rate and Coupon rate are different. The yield rate is at 12% and Bond pays 8%. In conclusion there is a discount for the bond rate.

Answer 1

The issue price at 12% market rate is $676.77

The difference between the issue price of $676.77 and the face value is first of all due to a higher discount rate of 12%(yield to maturity) compared to lower a stated rate of 8%(coupon rate),hence when the discount rate is higher ,bond is issued at discount and at a premium when coupon rate is higher.

Step-by-step explanation:

The price of the bond can be computed using the pv formula in excel,which is given as =-pv(rate,nper,pmt,fv)

rate is the semi-annual yield to maturity on the bond which is 12%/2=6%

nper is the number of coupon payments payable during the life of the bond ,which is 30*2(2 symbolizes semi-annual payment) =60

pmt is the semi-annual interest payment,which is 8%/2*$1000=$40

fv is the face value of the bond repayable on redemption ,which is $1000

=-pv(6%,60,40,1000)

=$676.77