Asked by Shavona Prater on Jul 22, 2024
Verified
Moerdyk Corporation's bonds have a 10-year maturity,a 6.25% semiannual coupon,and a par value of $1,000.The going interest rate (rd) is 4.75%,based on semiannual compounding.What is the bond's price?
A) 1,063.09
B) 1,090.35
C) 1,118.31
D) 1,146.27
Semiannual Coupon
A bond or other fixed-income security that pays interest to the holder every six months.
Interest Rate
The price, in terms of a percentage of the principal, that a borrower needs to pay a lender to utilize their financial resources.
Bond's Price
The market price for which a bond is bought or sold, influenced by factors like interest rates, the bond's credit quality, and its maturity date.
- Assess the value of bonds under distinct market circumstances.
Verified Answer
JM
Judith MartinezJul 22, 2024
Final Answer :
C
Explanation :
To calculate the bond's price, we need to use the bond pricing formula:
Bond price = (Coupon payment / Discount rate) x (1 - 1 / (1 + Discount rate)^Number of periods) + Par value / (1 + Discount rate)^Number of periods
Where:
Coupon payment = $1,000 x 6.25% / 2 = $31.25 (since the coupon is paid semiannually)
Discount rate = 4.75% / 2 = 2.375% (since the rate is also semiannual)
Number of periods = 10 years x 2 = 20 (since there are two semiannual periods in a year)
Plugging in the values:
Bond price = ($31.25 / 2.375%) x (1 - 1 / (1 + 2.375%)^20) + $1,000 / (1 + 2.375%)^20
Bond price = $1,118.31
Therefore, the correct answer is C.
Bond price = (Coupon payment / Discount rate) x (1 - 1 / (1 + Discount rate)^Number of periods) + Par value / (1 + Discount rate)^Number of periods
Where:
Coupon payment = $1,000 x 6.25% / 2 = $31.25 (since the coupon is paid semiannually)
Discount rate = 4.75% / 2 = 2.375% (since the rate is also semiannual)
Number of periods = 10 years x 2 = 20 (since there are two semiannual periods in a year)
Plugging in the values:
Bond price = ($31.25 / 2.375%) x (1 - 1 / (1 + 2.375%)^20) + $1,000 / (1 + 2.375%)^20
Bond price = $1,118.31
Therefore, the correct answer is C.
Learning Objectives
- Assess the value of bonds under distinct market circumstances.