(Bond valuation) Enterprise, Inc. bonds have an annual coupon rate of 9 percent. The interest is paid semiannually and the bonds mature in 9 years. Their par value is $1 comma 000. If the market's required yield to maturity on a comparable-risk bond is 11 percent, what is the value of the bond? What is its value if the interest is paid annually?

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hyderali230 hyderali230 · Answer 1 · 2020-03-24T03:12:07+01:00

Answer:

Bond's value if the interest is paid semiannually is $887.54

Bond's value if the interest is paid annually is $889.25

Explanation:

Coupon payment = 1000 x 9% = $90 annually = $45 semiannually

Number of periods = n = 9 years x 2 = 18 periods

Yield to maturity = 11% annually = 5.5% semiannually

Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula

If Interest paid Semiannually

Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]

Price of the Bond =$45 x [ ( 1 - ( 1 + 5.5% )^-18 ) / 5.5% ] + [ $1,000 / ( 1 + 5.5% )^18 ]

Price of the Bond = $506.07 + $381.47 = $887.54

If Interest paid Annually

Price of the Bond =$90 x [ ( 1 - ( 1 + 11% )^-9 ) / 11% ] + [ $1,000 / ( 1 + 11% )^9 ]

Price of the Bond = $498.33 + $390.92 = $889.25

Tundexi Tundexi · Answer 2 · 2022-01-04T12:50:06+01:00

The Price of the Bond will be $889.25 if the interest is paid annually.

Coupon payment = 1000 x 9%

Coupon payment = $90 annually

Number of periods = 9 years

Yield to maturity = 11% annually

The Price of bond means the PV of future cash flows

The formula for Price of the Bond = C x [( 1 - ( 1 + r )^-n ) / r ] + [ F / (1 + r )^n]

Price of the Bond = $90 x [ (1 - (1 + 11%)^-9 ) / 11%] + [$1,000 / (1 + 11%)^9]

Price of the Bond = $498.33 + $390.92

Price of the Bond = $889.25

Hence, the Price of the Bond will be $889.25 if the interest is paid annually.