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Chapter 5: Q9BP (page 528)

Question:Twenty-five-year B-rated bonds of Parker Optical Company were initially issued at a 12 percent yield. After 10 years the bonds have been upgraded to Aa2. Such bonds are currently yielding 10 percent to maturity. Use Table 16-2 to determine the price of the bonds with 15 years remaining to maturity. (You do not need the bond ratings to enter the table; just use the basic facts of the problem.)

Short Answer

Expert verified

Answer

The price per bond is computed as $1,153.72

Step by step solution

01

Definition of Coupon rate

The coupon rate is defined as the normal rate paid by the financial instrument. It is the annual coupon payment paid by the issuer of the securities.

02

Computation of price of the bond

SemiannualCoupon=CouponRate2脳FaceValue=0.122脳1,000=$60Priceperbond=CouponPayment脳(1-1+r-nr)+FaceValue(1+r)n=60脳(1-1+0.05-15脳20.05)+1,000(1+0.05)15脳2=$1,153.72

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Most popular questions from this chapter

The investment banking firm of Einstein & Co. will use a dividend valuation model to appraise the shares of the Modern Physics Corporation. Dividends (D1) at the end of the current year will be \(1.64. The growth rate (g) is 8 percent and the discount rate (Ke) is 13 percent.

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