2. a.Quantitative Problem: Potter Industries has a bond issue outstanding with a
ID: 2640041 • Letter: 2
Question
2. a.Quantitative Problem: Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 9%, what is the value of the bond? Round your answer to the nearest cent. Do not round intermediate calculations.
$
b. Quantitative Problem: Potter Industries has a bond issue outstanding with a 6% coupon rate with semiannual payments of $30, and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 9%, what is the value of the bond? Round your answer to the nearest cent. Do not round intermediate calculations.
$
Explanation / Answer
a) Annual Interest = $1000*6/100 = $60
Discount factor= 9%
Bond Value = PV of Interest cash flows + PV of Face value Redemption
Bond Value = $ 60 *( PVFA 10,9%) + $1000*(PVF 10,9%)
= $ 60*6.4177 + $ 1000*0.4224
= $385.062 +$422.4
=$807.46
b) In case of semi-annual interest payments there will be 20 payouts in 10 years
Discount factor = 9%
Bond Value= PV of Semi Annual Interest payouts + PV of Principal Redemption
Bond Value= $ 30*(PVFA 20,4.5%) + $1000*(PVF 20,4.5%)
=$30*13.0263 + $1000*0.4146
=$390.789 + $414.6
=$805.39
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