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22 April, 06:53

Regatta, Inc., has six-year bonds outstanding that pay an 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. How much will you be willing to pay for Regatta's bond today

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Answers (2)
  1. 22 April, 08:15
    0
    Price of bond = $1,065.79

    Explanation:

    The price of a bond is the present value of the expected interest payments plus the present value of the redemption value (RV)

    Price of a bond = PV of Interest payment + PV of RV

    PV of Interest payment

    Interest payment = 8.25% * 1000 = 82.5

    PV of interest payment

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

    A - interests payment, r - yield to maturity, r - year to maturity

    A - 82.5, r - 6.875%, n - 6

    PV of interest = 82.5 * (1 - (1.06875) ^ (-6)) / 0.06875 = 394.7615956

    PV of RV

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

    RV - Redemption value, r - yield to maturity, n - year to maturity

    PV of RV = 1000 * (1.06875) ^ (-6) = 671.0320037

    Price = 394.76 + 671.03

    Price = $1,065.79
  2. 22 April, 10:05
    0
    Price of bond = $1,065.79

    Explanation:

    Calculating the price of the bond, we use

    Price of a bond = PV of Interest payment + PV of RV

    Let's calculate the interest payment first as;

    Interest payment = 8.25% * 100 = 82.5

    PV of interest payment is calculated using this formula

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

    Where

    A = interests payment = 82.5

    r = yield to maturity = 6.875%

    n = year to maturity = 6

    Substituting the values, we

    PV of interest = 82.5 * (1 - (1.06875) ^ (-6)) / 0.06875

    PV of interest = 394.7615956

    PV of Redemption value is been calculated using this formula

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

    Where;

    RV = Redemption value = 1000

    r = yield to maturity = 0.06875

    n = year to maturity = 6

    Substituting the values in to the formula

    PV of Redemption value = 1000 * (1.06875) ^ (-6)

    PV of Redemption value = 671.0320037

    Finally

    Price of bond = PV of Interest payment + PV of RV

    Price of bond = 394.76 + 671.03

    Price of bond = $1,065.79
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Home » Business » Regatta, Inc., has six-year bonds outstanding that pay an 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. How much will you be willing to pay for Regatta's bond today
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