Question

Colby & Company bonds pay semi-annual interest of $50. They mature in 15 years and have a par value of $1,000. The market rate of interest is 8%. The market value of Colby Bonds is: (round to nearest dollar)

Answer 1

Price of bond = $ 1,172.92

Step-by-step explanation:

The value of the bond is the present value (PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).

Value of Bond = PV of interest + PV of RV

The value of bond for Colby & Company can be worked out as follows:

Step 1

PV of interest payments

Semi annul interest payment = 50

Semi-annual yield = 8%/2 = 4% per six months

Total period to maturity (in months)

= (2 × 15) = 30 periods

PV of interest =

50 × (1- (1+0.04^(-30)/0.04)= 864.60

Step 2

PV of Redemption Value

= 1,000 × (1.04)^(-30) =308.318

Step 3:

Price of bond

= 864.60 + 308.318 = $1,172.92

Price of bond = $ 1,172.92