PLEASE SHOW ALL WORK AND EXPLAIN ON FINANCIAL CALCULATOR IF POSSIBLE. KIC, Inc.,

Question

PLEASE SHOW ALL WORK AND EXPLAIN ON FINANCIAL CALCULATOR IF POSSIBLE.

KIC, Inc., plans to issue $8 million of bonds with a coupon rate of 6 percent and 20 years to maturity. The current market interest rates on these bonds are 10 percent. In one year, the interest rate on the bonds will be either 10 percent or 4 percent with equal probability. Assume investors are risk-neutral. a. If the bonds are noncallable, what is the price of the bonds today? Assume a par value of $1,000 and semiannual payments.

Explanation / Answer

FV of the bond = $1000

Coupon = Coupon rate*FV /2 =

6%*1000/2 = $30 per semiannual period

N= 20 years*2 = 40 semiannual periods

YTM= Rate = 10%/2 = 5% per semiannual period

Price of the bond = PV of the cash flows

= Coupon*(1-1/(1+r)^n)/r + FV/(1+r)^n

= 30*(1-1/1.05^40)/0.05 + 1000/1.05^40

=$656.82

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