Posted by **Yinka** on Thursday, November 15, 2012 at 10:24am.

Two years ago, Gamma Inc. sold a $250 million bond issue to finance the purchase of new jet airliners. These bonds were issued in $1,000 denominations with an original maturity of 14 years and a coupon rate of 12% with interest paid semiannually. Determine the value today of one of these bonds to an investor who requires a 14 percent return on these securities. Explain why the bond has a value that is not equal to the par value.

- STOCKS & BONDS -
**NAINIAVI@GMAIL**, Saturday, November 17, 2012 at 6:54am
Face value = $1,000

Coupon rate = 12%

Frequency of coupon payment = Semiannual

Coupon payment = $1,000*12%*1/2 = $60

Time to maturity now = 14 – 2 = 12 years

Required rate of return = 14%

Value of bond today = $60*PVIFA14%/2, 12*2 + $1,000*PVIF14%/2, 12*2

= $60*PVIFA7%, 24 + $1,000*PVIF7%, 24

= $60*11.46933 + $1,000*0.19715

= $688.16 + 197.15

= $885.31

Since Coupon rate ≠ Required rate of return, bond value is not equal to par value.

Coupon rate < Required rate of return, Bond value < Par value

- STOCKS & BONDS -
**financetutor21@gmail**, Saturday, November 17, 2012 at 9:40am
Face value = $1,000

Coupon rate = 12%

Frequency of coupon payment = Semiannual

Coupon payment = $1,000*12%*1/2 = $60

Time to maturity now = 14 – 2 = 12 years

Required rate of return = 14%

Value of bond today = $60*PVIFA14%/2, 12*2 + $1,000*PVIF14%/2, 12*2

= $60*PVIFA7%, 24 + $1,000*PVIF7%, 24

= $60*11.46933 + $1,000*0.19715

= $688.16 + 197.15

= $885.31

Since Coupon rate ≠ Required rate of return, bond value is not equal to par value.

Coupon rate < Required rate of return, Bond value < Par value

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