Question

g A Disney Corporation Bond with a $1,000 par value has a 10% annual coupon that pays $50 every 6 months. There are eight years (16, 6 month periods) before maturity and Disney will pay $50 each of those 16 periods plus it will pay back the $1,000 principal at maturity. The prevailing market rate for this bond has gone down from 10% to 8% annually (4% every six months). What is the value of the bond given this lower rate environment

Answer 1

The value of the bond is $1,116.52.

Step-by-step explanation:

The value of the bond is the sum of present value of cash flow earned from the bond, discounting at the market rate of 4% every six month, which are:

+ 16 semiannual dividend payments, $50 each whose present value is: (50/4%) / [ 1 - 1.04^(-16) ] = $582.61;

+ Principal repayment of $1,000 at the end of 8 years ( 16 periods - as one period is 6 months) whose present value is: 1,000/ 1.04^16 = $533.91.

=> Value of the bond = 582.61 + 533.91 = $1,116.52.

So, the answer is $1,116.52.