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35 You are considering buying bonds in ACBB, Inc. The bonds have a par value of...

35

You are considering buying bonds in ACBB, Inc. The bonds have a par value of $1,000 and mature in 35 years. The annual coupon rate is 20.0% and the coupon payments are annual. If you believe that the appropriate discount rate for the bonds is 17.0%, what is the value of the bonds to you?

$1,374.92
$1,175.75
$850.25
$1,019.97
$1,285.29
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Answer #1

Annual coupon=$1000*20%=$200

Value of bonds=Annual coupon*Present value of annuity factor(17%,35)+$1000*Present value of discounting factor(17%,35)

=$200*5.858195779+$1000*0.00410671759

which is equal to

=$1175.75(Approx).

NOTE:

1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$200[1-(1.17)^-35]/0.17

=$200*5.858195779

2.Present value of discounting factor=$1000/1.17^35

=$1000*0.00410671759

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