Answer 120021 Please show all steps to final answer The XYZ

The XYZ Corp. issued 12% bonds several years ago at $975. The currently maturity and have eight years to maturity. What is the current price of the bonds? Answer: S1,200.21 bonds have an 8.5 % yield to

Solution

Price of Bond = Cupon Amount * Present Value of Annuity Factor (r,n) + Redemption Amount * Present Value of Interest Factor (r,n)

Note - In the question the frequency of compounding is not given. Therefore we will assume Semi Annual compounding to do the solution.

Face value of bonds are usually $1000

Where Cupon Amount = $1000 * 12% * 1/2

= $60

Why did we multiply with 1/2?

Since compounding is Semi Annual

Redemption Amount = $1000

r = 8.5% * 1/2

r = 4.25%

(Semi annual compounding)

n = remaining maturity

n = 8 *2

n = 16

Present Value of Annuity Factor (4.25% ,16) = 11.44031

Present Value of Interest Factor (4.25% ,16) = 0.51379

Therefore

Bond Price = $60 * 11.44031 + $1000 * 0.51379

Bond Price = $686.4186 + $513.79

Bond Price = $1200.2086

Rounding to two decimal places

Bond Price = $1200.21

Therefore Current Price of the bonds = $1200.21