Renfro Rentals has issued bonds that have a 10 coupon rate p

Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 10%. What is the price of the bonds? Round your answer to the nearest cent.

Solution

CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is   = $1,000 Annual Coupon % 10.00% Annual Coupon Amount $100.00 Semi Annual Coupon Amount $50.00 Step 2: Calculate number of years to Maturity Number of years to maturity = 8 years Interest is paid semi annyally so total period = 8 Years * 2 = 16 Periods Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds Market rate of interest or Yield to Maturity or Required Return = 8% Bonds interest is paid semi annualy means so discounting factor = 8 % /2= 4 % PVF = 1 / Discount rate = 1/ 1.04 Result of above will again divide by 1.04 , repeat this lat period Period Interest Amount (In Million) PVF @ 4% PresentValue 1 Interest $50.00                     0.9615 $48.08 2 Interest $50.00                     0.9246 $46.23 3 Interest $50.00                     0.8890 $44.45 4 Interest $50.00                     0.8548 $42.74 5 Interest $50.00                     0.8219 $41.10 6 Interest $50.00                     0.7903 $39.52 7 Interest $50.00                     0.7599 $38.00 8 Interest $50.00                     0.7307 $36.53 9 Interest $50.00                     0.7026 $35.13 10 Interest $50.00                     0.6756 $33.78 11 Interest $50.00                     0.6496 $32.48 12 Interest $50.00                     0.6246 $31.23 13 Interest $50.00                     0.6006 $30.03 14 Interest $50.00                     0.5775 $28.87 15 Interest $50.00                     0.5553 $27.76 16 Interest $50.00                     0.5339 $26.70 16 Bond Principal Value $1,000.00                     0.5339 $533.91 Total $1,116.52 Current Bonds Price = $1,116.52 Answer = 1 =Issue price of the bond= $1,116.52