The Garcia Company’s bonds have a face value of $1,000, will mature in ten years
ID: 2651586 • Letter: T
Question
The Garcia Company’s bonds have a face value of $1,000, will mature in ten years, and carry a coupon rate of 16 percent. Assuming that the interest payments are made semi-annually, answer the following:
a. Determine the present value of the bond’s cash flows if the required rate of return is 16.64 percent.
Answer:
The periodic interest rate is the value of r such that =
The semiannual coupon =
The number of periods =
Price =
b.. How would your answer change if the required rate of return is 12.36 percent?
Answer:
The periodic interest rate is the value of r such that =
Price =
Explanation / Answer
The periodic interest rate is the value of r such that = 16.64% annualy so half yearly 8.32%
Coupon rate= 16% annually i.e.8% semi annually
Face value: 1000
The semiannual coupon ( c) =1000*8%=$80
The number of periods = 20 half year
Price =
= 80* {(1-1/(1+8.32%)^20/8.32% + $1000/(1+8.32%)^20
=767+202
=$969
b.
How would your answer change if the required rate of return is 12.36 i.e rate = 6.18%
Answer:
80* {(1-1/(1+6.18%)^20/6.18% + $1000/(1+6.18%)^20
=$904+$301
=$1205.73
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