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9 January, 00:23

Six years ago, James Corporation sold a $100 million bond issue to expand its facilities. Each debenture has a $1,000 par value, an original maturity of 20 years (there are now 14 years left to maturity), and an annual coupon rate of 11.5% with semiannual payments. If you require a 14% return, what price would you pay today for a James bond?

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  1. 9 January, 01:28
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    Price of Bonds=$848.286

    Explanation:

    The value of the bond is the present value (PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV) discounted at the yield rate

    Value of Bond = PV of interest + PV of RV

    The value of bond for James Corporation can be worked out as follows:

    Step 1

    PV of interest payments

    PV = A * (1+r) ^ (-n) / r

    A - semiannual interest payment, n-number of periods, r - semi annul yield

    A-semi - annul interest payment:

    =11.5% * 1,000 * 1/2 = 75

    r-semi-Annual yield = 14%/2 = 7%

    n-Maturity period = 1 4 * 2 = 28

    PV of interest payment:

    =57.5 * (1 - (1+0.07) ^ (-28) / 0.07)

    = 697.88

    Step 2

    PV of Redemption Value

    = 1,000 * (1.07) ^ (-28) = 150.40

    Step 3

    Price of bond

    =697.88 + 150.40

    =$848.286
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