Haswell enterprises' 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 current price?
First get the expected cash flow per year in 10 years at the coupon rate of 6.25% semiannually with par value of $1000. semiannual cash = $1000x(0.0625)x2 Expected cash1 ...Expected cash9 = $125 Expected cash10= $1125 Get the bond value with the use of this formula year bond valuation year(n) = Expected cash(n)/(1+interest) to the power of n where n = year interest = 0.475/2, since it is semiannual year bond valuation year 1= $125/(1+0.0475/2)^1 =$122.100 compute till year 10, then add all year bond valuationpresent bond value = summation of year bond valuation present bond value= $122.1+$119.28+$116.5+$113.8+$111.16 +$108.58+$106.06+$103.6+$101.2+$889.64 = $1892.82
The present value is greater than the par value because the coupon rate is higher than the interest rate.
