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Chapter 5: Q6BP (page 528)

The Florida Investment Fund buys 58 bonds of the Gator Corporation through a broker. The bonds pay 10 percent annual interest. The yield to maturity (marketrate of interest) is 12 percent. The bonds have a 10-year maturity.

Using an assumption of semiannual interest payments:

a.Compute the price of a bond (refer to “Semiannual Interest and BondPrices” in Chapter 10 for review if necessary).

b.Compute the total value of the 58 bonds.

Short Answer

Expert verified

a. Price of bond equals $885.30.

b. Total value of 58 bonds equals $51,347.40.

Step by step solution

01

Computation of coupon payment

Assuming the par value of the bond = $1,000

Semi-annual interest rate equals 6% (12% / 2).

Semi-annual periods equals 20 (10 x 2).

Coupon=Parvalue×Semi-annualcoupanrate=$1,000×5%=$50

02

Computation of price of bond

Priceperbond=CouponPayment×(1-1+r-nr)+FaceValue(1+r)n=50×(1-1+0.06-10×20.06)+1,000(1+0.06)10×2=$885.30

03

 Step 3: (b) Computation of Price of 58 bonds

Priceof58bonds=Priceofasinglebond×No.ofbonds=$885.30×58=$51,347.40

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Most popular questions from this chapter

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

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