Question

Lunar, Inc., plans to issue $900,000 of 10% bonds that will pay interest semiannually and mature in 5 years. Assume that the effective interest rate is 12% per year compounded semiannually. Compute the selling price of the bonds. Use Tables 2 and 3 in Appendix A near the end of the book.

Answer 1

Bond Price = $833759.2165 rounded off to $833759.22

Step-by-step explanation:

To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,

Coupon Payment (C) = 900000 * 0.1 * 6/12 = $45000

Total periods (n) = 5 * 2 = 10

r or YTM = 0.12 * 6/12 = 0.06 or 6%

The formula to calculate the price of the bonds today is attached.

Bond Price = 45000 * [( 1 - (1+0.06)^-10) / 0.06] + 900000 / (1+0.06)^10

Bond Price = $833759.2165 rounded off to $833759.22