Consider Allied Signal Corporation’s 9 7/8percent bonds that mature on June 1, 2
ID: 2770472 • Letter: C
Question
Consider Allied Signal Corporation’s 9 7/8percent bonds that mature on June 1, 2010. Assume that the intereston these bonds is paid and compounded annually. Determine the valueof a $1,000 denomination Allied Signal Corporation bond as of June1, 2004, to an investor who holds the bond until maturity and whoserequired rate of return is:
a. 7 percent
b. 9 percent
c. 11 percent
d. What would be the value of the Allied SignalCorporation bonds at an 8 percent required rate of return if theinterest were paid and compounded semiannually?
Explanation / Answer
Given Information:
Future value of the bond (FV) = $1000
CouponRate = 9 7/8% [9+0.875% =9.875%]
Numberof years to maturity = 6 years[June1, 2004 to June1,2010]
(2) Calculate the Present value of a single sum of$1000 discounted at the market rate of interest 7%, where n=6.
Present Value of Single sum = $1000 * Present value factor
(3) Add the sum of present value of an annuity ofinterest payment and Present value of a single sum.
Bond Value = $98.75 * 4.766 + $1000 * 0.666
Bond Value = $470.6425 + $666
(b) Required Return = 9%
(The Present Value of annuity of Interest Payment =$98.75*Present value interest factor) + (Present Value of Singlesum = $1000 * Present value factor)
Bond Value = $98.75 * 4.486 + $1000 * 0.596
Bond Value = $442.9925 + $596
(c) Required Return = 11%
(The Present Value of annuity of Interest Payment =$98.75*Present value interest factor) + (Present Value of Singlesum = $1000 * Present value factor)
Bond Value = $98.75 *4.23058 + $1000 * 0.53464
Bond Value = $417.77 + $534.64
(d) Required Return = 8%
If the Interest were paidand compounded semiannually:
Number of yearsto maturity = 12 years [6*2 = 12]
Interest Payment = $49.375 [9.875/ 2 = 4.9375%]
Bond Value = $98.75 *9.385 + $1000 * 0.625
Bond Value = $463.384375 + $625
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