Answer:
Price of bond = $ 1,172.92
Explanation:
The value of the bond is the present value (PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).
Value of Bond = PV of interest + PV of RV
The value of bond for Colby & Company can be worked out as follows:
Step 1
PV of interest payments
Semi annul interest payment = 50
Semi-annual yield = 8%/2 = 4% per six months
Total period to maturity (in months)
= (2 × 15) = 30 periods
PV of interest =
50 × (1- (1+0.04^(-30)/0.04)= 864.60
Step 2
PV of Redemption Value
= 1,000 × (1.04)^(-30) =308.318
Step 3:
Price of bond
= 864.60 + 308.318 = $1,172.92
Price of bond = $ 1,172.92
