Rainbow Corp. bonds, which has a maturity of 7 years, paying 4 percent interest on a $1000 face value. Interest is paid semiannually. The required rate of return is 5 percent, what is the value of bond?
A) Semiannual payments, the value of the bond is $ ?
B) Annual payments the value of the bond is $ ?

A. TIME = 7 YEARS

N = 7*2 = 14

COUPON RATE = 4%

SEMI ANNUAL COUPON RATE = 4/2 = 2%

COUPON PAYMENT = 0.02 * 1000

= $20

FACE VALUE = $1000

REQUIRED RATE = 5% (SEMIANNUAL)

SEMI ANNUAL RATE = 5/2 = 2.5%

VALUE OF THE BOND = INTEREST / ( 1 + R) ^1 + INTEREST / ( 1 + R) ^2 + INTEREST / ( 1 + R) ^3 + INTEREST / ( 1 + R) ^4 + INTEREST / ( 1 + R) ^5 +INTEREST / ( 1 + R) ^6 + INTEREST / ( 1 + R) ^7 + INTEREST / ( 1 + R) ^8 + INTEREST / ( 1 + R) ^9 + INTEREST / ( 1 + R) ^10 + INTEREST / ( 1 + R) ^11 + INTEREST / ( 1 + R) ^12 + INTEREST / ( 1 + R) ^13 +( INTEREST + FACE VALUE ) / ( 1 + R) ^14

= 20 / (1.025)^1 + 20 / (1.025)^2 + 20 / (1.025)^3 + 20 / (1.025)^4 + 20 / (1.025)^5 + 20 / (1.025)^6 + 20 / (1.025)^7 + 20 / (1.025)^8 + 20 / (1.025)^9 + 20 / (1.025)^10 + 20 / (1.025)^11 + 20 / (1.025)^12 + 20 / (1.025)^13 + 1020 / (1.025)^14

= 19.51219 + 19.03628 + 18.57198 + 18.11901 + 17.67708 + 17.24594 + 16.82530 + 16.41493 + 16.01456 + 15.62397 + 15.24289 + 14.87111 + 14.50841 + 721.88174
= $941.54539

= $941.54

OR, WE CAN SOLVE IN BA II PLUS FINANCIAL CALCULATOR:

ENTER THE FOLLOWING:

FV = 1000

PMT = 20

I/Y = 2.5%

N = 14

COMPUTE PV

THEREFORE, PV = $941.54

B. TIME = 7 YEARS

COUPON RATE = 4%

REQUIRED RATE = 5% (ANNUAL)

FACE VALUE = $1000

COUPON PAYMENT = 1000 * 0.04 = $40

VALUE OF THE BOND = INTEREST / ( 1 + R) ^1 + INTEREST / ( 1 + R) ^2 + INTEREST / ( 1 + R) ^3 + INTEREST / ( 1 + R) ^4 + INTEREST / ( 1 + R) ^5 + INTEREST / ( 1 + R) ^6 + (INTEREST + FACE VALUE) / ( 1 + R) ^7

= 40 / (1.05)^1 + 40 / (1.05)^2 + 40 / (1.05)^3 + 40 / (1.05)^4 + 40 / (1.05)^5 + 40 / (1.05)^6 + 1040 / (1.05)^7

= 38.09524 + 36.28118 + 34.5535 + 32.9081 + 31.34105 + 29.84862 + 739.10858

= $942.13627

= $942.14 ( ANSWER)

OR, WE CAN SOLVE IN BA II PLUS FINANCIAL CALCULATOR:

ENTER THE FOLLOWING:

FV = 1000

PMT = 40

I/Y = 5%

N = 7

COMPUTE PV

THEREFORE, PV = $942.14