Question

Cullumber, Inc., has outstanding bonds that will mature in six years and pay an 8 percent coupon semiannually. If you paid $1,033.85 today and your required rate of return was 6.6 percent.

A. How much should you have paid for the bond?B. Worth of the bond is?

Answer 1

The worth of the bond is $1068.44

Step-by-step explanation:

Solution

Given that

Supposed that the face of the bond is $1000

Thus

The semiannual coupon payment = 1000*8%*6/12

= 40 (semiannual period in a year comprising of 6 months each)

Then

Semiannual periods = 6 years *2

=12

The semiannual yield = 6.6*6/12

= 3.3%

So,

The present value of bond = (PVA3.3%,12*semiannual coupon payment) + (PVF3.3%,12*Face value)

=(9.77808*40) + (.67732*1000)

=391.12+ 677.32

=$1068.44

The worth of the bond is $1068.44

nnote: Find present value factor using the formula 1/(1+i)^n

(Where i = 3.3%, n= 12 ) or using financial calculator by putting i = 3.3%,n=12 and FV= 1

Also, Find present value annuity factor using the formula [1/(1+i)^1 +1/(1+i)^2 +......+(1+i)^11+1/(1+i)^12 ] or using financial calculator where i = 3.3%,n= 12 and PMT =1