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26 January, 18:27

Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 8.6%, what is the value of the bond

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  1. 26 January, 19:46
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    Value of the bond = $767.70

    Explanation:

    The value of the bond is the present value of the future cash receipts expected from the bond. The value is equal to present values of interest payment and the redemption value (RV).

    Value of Bond = PV of interest + PV of RV

    The value of bond for Potter Industries can be worked out as follows:

    Step 1

    Calculate the PV of Interest payment

    Present value of the interest payment

    PV = Interest payment * (1 - (1+r) ^ (-n)) / r

    Interest payment = 6% * $1,000 = $60

    PV = 60 * (1 - (1.0.086) ^ (-10) / 0.086)

    = 60 * 5.4912

    = 329.47

    Step 2

    PV of redemption Value

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

    = 1000 * (1.086) ^ (-10)

    = 438.229

    Step 3

    Calculate Value of the bond

    =329.47 + 438.229

    =767.7066285

    Value of the bond = $767.70
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