What is the value of the interest is paid annually? Secure | https://www.mathxl.
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What is the value of the interest is paid annually? Secure | https://www.mathxl.com/Student/PlayerHomework.aspx?homeworkid=44864 334.. FINC 300 (01): Fall 2017 Save Homework: Chapter 9 Homework Score: 0 of 3 pts | 4 of 12 (2 complete) HW Score: 16.5%, 4.95. P9-5 (similar to) Quesation Help (Bond valuation) Enterprise, Inc. bonds have an annual coupon rate of 15 percent. The interest is paid semiannually and the bonds mature in 11 years. Their par value is $1,000. If the market's required yield to maturity on a comparable-risk bond is 9 percent, what is the value of the bond? What is its value if the interest is paid annually? a. The value of the Enterprise bonds if the interest is paid semiannually is S(Round to the nearest cent.) Enter your answer in the answer box and then click Check Answer Check Answer part remaining Clear All
Explanation / Answer
CALCULATION OF CURRENT MARKET PRICE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is = $1,000 Annual Coupon % 15.00% Annual Coupon Amount $150 Semi Annual Coupon Amount $75 Step 2: Calculate number of years to Maturity Number of years to maturity = 11 years Interest is paid semi annyally so total period = 22 Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds Market rate of interest or Yield to MAturity = 9% Bonds interest is paid semi annualy means discounting factor = 9% / 2 = 4.5% PVF = 1 / Discount rate = 1/ 1.045 Result of above will again divide by 1.06 , repeat this lat period Period Interest Amount PVF @ 4.5% PresentValue 1 Interest $75.00 0.9569 $71.77 2 Interest $75.00 0.9157 $68.68 3 Interest $75.00 0.8763 $65.72 4 Interest $75.00 0.8386 $62.89 5 Interest $75.00 0.8025 $60.18 6 Interest $75.00 0.7679 $57.59 7 Interest $75.00 0.7348 $55.11 8 Interest $75.00 0.7032 $52.74 9 Interest $75.00 0.6729 $50.47 10 Interest $75.00 0.6439 $48.29 11 Interest $75.00 0.6162 $46.21 12 Interest $75.00 0.5897 $44.22 13 Interest $75.00 0.5643 $42.32 14 Interest $75.00 0.5400 $40.50 15 Interest $75.00 0.5167 $38.75 16 Interest $75.00 0.4945 $37.09 17 Interest $75.00 0.4732 $35.49 18 Interest $75.00 0.4528 $33.96 19 Interest $75.00 0.4333 $32.50 20 Interest $75.00 0.4146 $31.10 21 Interest $75.00 0.3968 $29.76 22 Interest $75.00 0.3797 $28.48 22 Bond Value $1,000.00 0.3797 $379.70 Total $1,413.53 Value of the Bond = $ 1413.53 CALCULATION OF CURRENT MARKET PRICE OF THE BOND IF THE INTEREST PAID ANNUALLY Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is = $1,000 Annual Coupon % 15.00% Annual Coupon Amount $150 Step 2: Calculate number of years to Maturity Number of years to maturity = 11 years Step 3 : Yield to Maturity = 9%, So discount rate = 9% PVF = 1 / Discount rate = 1/ 1.09 Result of above will again divide by 1.088 , repeat this till last period Years Interest Amount PVF @ 9% PresentValue 1 Interest $150.00 0.9174 $137.61 2 Interest $150.00 0.8417 $126.25 3 Interest $150.00 0.7722 $115.83 4 Interest $150.00 0.7084 $106.26 5 Interest $150.00 0.6499 $97.49 6 Interest $150.00 0.5963 $89.44 7 Interest $150.00 0.5470 $82.06 8 Interest $150.00 0.5019 $75.28 9 Interest $150.00 0.4604 $69.06 10 Interest $150.00 0.4224 $63.36 11 Interest $150.00 0.3875 $58.13 11 Bond Value $1,000.00 0.3875 $387.53 Total $1,408.31 Market Value of the Bond = $1,408.31
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