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31 October, 12:43

What is the value of $1,000 par value 9.375% Marriott Corporation bond for 7% required rates of return, assuming the investor will hold the bond to maturity? Assume the coupon is paid semiannually (every six months) and the bond matures in 3 years?

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  1. 31 October, 13:47
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    = $1,063.28

    Explanation:

    Answer:

    Explanation:

    The price of a bond is the present value (PV) of the future cash inflows expected from the bond discounted using the yield to maturity.

    The yield on the bond - 7%

    Coupon rate - 9.375%

    The price of the bond can be calculated as follows:

    Step 1

    PV of interest payment

    Semi-annual coupon rate = 9.375%/2 = 4.6875%

    semi-annual Interest payment

    = (4.6875%*$1000) =

    = $46.875 per six month

    Semi-annual yield = 7%/2 = 3.5%

    PV of interest payment

    = A * (1 - (1+r) ^ (-n)) / r

    = 46.875 * (1 - (1.035) ^ (-3*2)) / 0.035)

    = 46.875 * 5.32855302

    =$ 249.775

    Step 2

    PV of redemption value (RV)

    PV = RV * (1+r) ^ (-n)

    = 1,000 * (1+0.035) ^ (-2 * 3)

    = 813.500

    Step 3

    Price of bond =

    249.77 + 813.50

    = $1,063.28
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