Question

Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (r d) is 4.75%, based on semiannual compounding. What is the bond's price?

Answer 1

The bond's price is $1118.31

Step-by-step explanation:

The price of the bond today is the present value of the interest payments from the bond along with the present value of the face value of the bond. The present value of the interest payments is the present value of the annuity. Thus, the price of the bond should be,

The semi annual interest payment is 1000 * 0.0625 * 1/2 = 31.25

The semi annual compounding period are = 10 *2 = 20 periods

Price of the bond = 31.25*[(1 - (1+0.02375)^-20) / 0.02375] +

1000/(1+0.02375)^20

Price of the bond = $1118.31

Answer 2

Bond price is $1,118.31

Step-by-step explanation:

The bond's price can be computed using the pv formula in excel.which is =-pv(rate,nper,pmt,fv)

rate is the semi-annual interest rate of 4.75%/2=2.375%

The nper is the number of times the bond would pay coupon interest which is 10 years multiplied by 2=20

The pmt is the semi-annual coupon interest which is $1000*6.25%/2=$31.25

The fv is the face value of $1000 at which the bond would be retired

=-pv(2.375%,20,31.25,1000)

pv=$1,118.31

Ultimately the bond price is $1,118.31

The bond was issued at a premium of $118.31