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Hello students, here is a question.
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A company has outstanding of 1000 par value of a bond with 8 % coupon interest rate.
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The bond has 12 years remaining until its mature date.
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So if the interest paid annually, find the value of a bond when required to return 7%, 8 % and 10 % and the second is indicate for each case apart whether a bond is selling at a discount premium on the par value and the third is using 10 % required return, find the bond value when interest rate is paid semi -annually.
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So this is our question.
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Let us discuss the answer for this.
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First we need to find the present value of a bond.
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Each requires a return, the present value of a bond in the sum of present value of a future cash flow, which includes the coupon payment at a face value of maturity.
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So the present value of a coupon payment will be pv is equal to c into 1 minus 1 plus r to the power minus n divided by r.
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So where pv is a present value, c is a coupon payment, r is a required rate of return, n is a number of periods.
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So in this case, let us plug the value 0 .0.
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It will be the c into 1000, which is 80 into 1 minus 1 plus r is 0 .07.
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Then to the power n is minus 12 divided by 0 .07.
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So when we substitute this, we get answer as 649 .53.
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So the present value of a face value is maturity of a present value.
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So the single sum which has been calculated by pv is equal to fv divided by 1 plus r to the power n.
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So where pv is a present value, fv is a face value, r is a required return and n is a number of periods...