Quantitative Problem: Potter Industries has a bond issue outstanding with an annual coupon of 6% and a 10-year maturity. The par value of the bond is $1,000. If the going annual interest rate is 7.8%, what is the value of the bond? Do not round intermediate calculations. Round your answer to the nearest cent.

$878.12

Explanation:

Value of bond is calculated by discounting this value of its coupon payments by an appropriate discount rate. The discount rate used is the yield to maturity, which is that the rate of return that an investor will get if he or she reinvested every coupon payment from the bond at a fixed interest rate until the bond matures. It takes into consideration the worth of a bond, par value, coupon rate, and time to maturity.

Mathematically,

V coupons=∑ C/(1+r) t

CV face value= F/(1+r) T

where:

C=future cash flows, that is, coupon payments

r=discount rate, that is, yield to maturity

F=face value of the bond

t=number of periods

T=time to maturity

Find the attached sheet for solving.

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