Bond Prices
Suppose that Firm Y has bonds outstanding that mature in 12 years and offer a 6.5 percent annual coupon rate, paid semiannually. Market required returns on similar bonds are 6.25 percent annual. For parts a. through c., use an algebraic solution to the problem, not a financial calculator and calculate and show the value of the present value factor for both the interest payment component and the return of principal component of the bond’s value.
a. What is the interest payment component of this bond’s intrinsic value?
b. What is the return of principal component of this bond’s intrinsic value?
c. What is the total intrinsic value of the bond?
d. Use your financial calculator to confirm your result in part c. Show the keystrokes and values input to the calculator.