Heather Smith is considering a bond investment in Locklear Airlines. The $1000 p
ID: 2648185 • Letter: H
Question
Heather Smith is considering a bond investment in Locklear Airlines. The $1000 par value bonds have a quoted annual interest rate of 9 percent and interest is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 15 years to maturity. Compute the price of the bonds based on semiannual analysis. Heather Smith is considering a bond investment in Locklear Airlines. The $1000 par value bonds have a quoted annual interest rate of 9 percent and interest is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 15 years to maturity. Compute the price of the bonds based on semiannual analysis.Explanation / Answer
SOLUTION:
Calculation of Price of Bonds.
Principal of bonds = $1000
Interest rate = 9% or 0.09
Years to maturity = 15 years
Bond Value = $1000 * 0.09 = $90
$90 / 2 = $45 ( this is for every six months )
Semiannual payments = 15 years * 2 = 30 payments
Yield to maturity = 12% / 2 = 6%
PV = $45 * (PVIFA6% for 30years)
PV = $45 * 13.7648
PV = $619.416
PV of Principal Payment = $1000 * (PVIF6% for 30years)
PV of Principal Payment = $1000 * 0.1741
PV of Principal Payment = $174.1
Price of the bonds = $619.416 + $174.1
Price of the bonds = $793.516
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