Question

A Microgates Industries bond has a 10 percent coupon rate and a $1,000 face value. Interest is paid semiannually, and the bond has 20 years to maturity. If investors require a 12 percent yield, what is the bond’s value? * a. $849.45 b. $879.60 c. $985.18 d. $963.15 e. None of the above

Answer 1

a. $849.45

Explanation:

In the above question, we are given the following information

Coupon rate = 10%

Face value = 1000

Maturity = n = 20 years

t = number of periods = compounded semi annually = 2

Percent yield = 12% = 0.12

Bond Value formula =

C/t × ([1 -( 1/ 1 + r/t)-^nt ÷] r/t) +( F/ (1 + r/t)^nt)

C = coupon rate × face value = 10% × 1000 = 100

Bond value:

= 100/2 × ( [1 - (1 /1 + 0.12/2)^-20×2]÷ 0.12/2)+ (1000/( 1 + 0.12/2)^20×2

= 50 × ( [1 - (1 /1 + 0.06) ^40] ÷ 0.06) + ( 1000/ (1 + 0.06) ^40

= 50 × ( [1 - (1/ (1.06) ^40] ÷ 0.06 ) + (1000/(1.06)^40)

= 50 × 15.046296872 + 97.222187709

= $849.45

Bond value = $849.45