Heather Smith is considering a bond investment in Locklear Airlines. The $1,000

Question

Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 8 percent and the interest is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. There are 9 years to maturity. Compute the price of the bonds based on semiannual analysis. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (D o not round intermediate calculations. Round your final answer to 2 decimal places.)

Explanation / Answer

Price of bond = $1000

Annual interest rate = 8%

Semi annual interest rate = 4%

Yield to maturity = 10%

If interest paid semi annually, yield to maturity = 5%

Period = 9 years

If interest paid semi annually, time period = 18 years

Price of bond = interest * cumulative present value factor (n=1-18th year, 5%) + face value * present value factor (n=18,5%)

= 40 * 11.690 + 1000 * 0.416

= 883.6

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