Question

McCurdy Co.'s Class Q bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value. McCurdy's Class P bonds have the same risk, maturity, and par value, but the P bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual payment bond sell

Answer 1

$993.08

Step-by-step explanation:

the market interest is 2.875% semiannual, that is why Q bonds are sold at par. To determine the value of P bonds we must add the present value of the face value and the coupon payments:

the effective interest rate = (1 + 5.75%/2)² - 1 = 5.83%

PV of face value = $1,000 / (1 + 5.83%)¹² = $1,000 / 1.974405523 = $506.48

PV of coupon payments = $57.50 x 8.46254 (PV annuity factor, 5.83%, 112 periods) = $486.60

market price = $993.08