I'm studying for finals and looking over an old test. Its multiple choice and she circled the correct answer but i keep getting $928.39. Can someone please explain how i answer this problem? Thanks in advance...heres the question:
The Carter Company's bonds that mature in 12 years have a par value of $1,000 and a coupon rate of 8%, with semi-annual coupon payments. The market interest rate for the bonds is 9% What is the price of these bonds?
2006-12-09 11:30:02 · 1 answers · asked by inspecther_dave 1 in Education & Reference ➔ Homework Help
Since the current market rate is higher than the coupon rate for the bond, it must trade at a price lower than its par value.
So its market price is must be set to yield 9% on an 8% coupon.
The yield must be composed of two pieces, the current yield plus the yield on the 'growth' in value of the bond.
The bond pays $40 (8% rate) every 6 months (24 payments) instead of $45 (9% rate). Find the net present value of the difference. The bond 'grows' as it moves toward maturity, find the net present value of $1,000 discounted for 1/2% over 24 coupon payments.
My tables are buried under a pile of dirty laundry, so you have to do the math.
2006-12-09 23:06:31 · answer #1 · answered by SPLATT 7 · 1⤊ 0⤋