Question

Kebt Corporation's Class Semi bonds have a 12-year maturity and an 6.00% coupon paid semiannually (3% each 6 months), and those bonds sell at their $1,000 par value. The firm's Class Ann bonds have the same risk, maturity, nominal interest rate, and par value, but these bonds pay interest annually. Neither bond is callable. At what price should the annual payment bond sell?

Answer 1

Price of bond = $997.76

Step-by-step explanation:

Using Excel, Effective rate = Rate(Nominal rate, NPer)

Effective rate = Rate(3%, 2)

Effective rate = 0.030225

Effective rate = 3.0225%

Calculation of the selling price of the bond

Price of bond = PV(Rate, Nper, PMT, FV)

Rate = 3.0225%

Nper = 12

PMT = -1000*3% = -30

FV = -1000

Price of bond = PV(3.0225%, 12, -30, -1000)

Price of bond = 997.7633542

Price of bond = $997.76