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Q: Accounting question (market price) ( Answered 5 out of 5 stars,   0 Comments )
Subject: Accounting question (market price)
Category: Business and Money > Accounting
Asked by: steph21480-ga
List Price: $2.00
Posted: 27 Nov 2006 05:28 PST
Expires: 27 Dec 2006 05:28 PST
Question ID: 785899
What is the market price of a $200,000, ten-year, 12% (pays interest
semi-annually) bond issue sold to yield an effective rate of 10%?
Subject: Re: Accounting question (market price)
Answered By: omnivorous-ga on 27 Nov 2006 07:55 PST
Rated:5 out of 5 stars
Steph21480 --

This bond pays 20 coupons of $12,000 (12% or $24,000 for each year)
PLUS the bond redemption itself at the end of period 20.  We'll set
this up as a net present value (NPV) problem, with a discount of 5.0%
each six months (10% per year).  The NPV is the price of the bond.

I've placed the NPV calculations in a spreadsheet here:

The total value of the bond coupons is $149,546.52, while the value of
getting the principal back in 10 years is $75,377.90.  So, the market
value of the bond is $224,924.42.

You'll note that the price is higher than the bond.  This is because
the coupon rate is above the market interest rate of 10%.  Normally a
corporate finance staff would try to price the bond closer to par
value, but this shows how interest rate spreads work to RAISE the
price of a bond.

Best regards,

steph21480-ga rated this answer:5 out of 5 stars
Excellent researcher- very quick and helpful. A+++

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