Bond valuation Lahey Industries has outstanding a $1 000 par-value bond with an 8% coupon interest

QUESTION

Bond valuation Lahey Industries has outstanding a $1,000 par-value bond with an 8% coupon interest rate. The bond has 12 years remaining to its maturity date.a. If interest is paid annually, find the value of the bond when the required return is (1) 7%, (2) 8%, and (3) 10%.b. Indicate for each case in part a whether the bond is selling at a discount, at a premium, or at its par value.c. Using the 10% required return, find the bonds value when interest is paid semiannually.
Face Value = $ 1,000 Coupon Rate = 8 % t = 12 years C = Face Value x Coupon Rate C = 1000 x 0.08 C = $ 80 Answer A(1) Year Cashflow Discount factor @ 7% Discounted Amount 1 80 0.935 74.77 2 80 0.873 69.88 3 80 0.816 65.30 4 80 0.763 61.03 5 80 0.713 57.04 6 80 0.666 53.31 7 80 0.623 49.82 8 80 0.582 46.56 9 80 0.544 43.51 10 80 0.508 40.67 11 80 0.475 38.01 12 1080 0.444 479.53 Present Value 1,079.43 Answer A(2) Year Cashflow Discount factor @ 8% Discounted Amount 1 80 0.926 74.07 2 80 0.857 68.59 3 80 0.794 63.51 4 80 0.735 58.80 5 80 0.681 54.45 6 80 0.630 50.41 7 80 0.583 46.68 8 80 0.540 43.22 9 80 0.500 40.02 10 80 0.463 37.06 11 80 0.429 34.31 12 1080 0.397 428.88 Present Value 1,000.00 Answer A(3) Year Cashflow Discount factor @ 10% Discounted Amount 1 80 0.909 72.73 2 80 0.826 66.12 3 80 0.751 60.11 4 80 0.683 54.64 5 80 0.621 49.67 6 80 0.564 45.16 7 80 0.513 41.05 8 80 0.467 37.32 9 80 0.424 33.93 10 80 0.386 30.84 11 80 0.350 28.04 12 1080 0.319 344.12 Present Value 863.73 Answer B Required Return = 7% Present Value 1,079.43 Face Value 1,000.00 Present Value > Face Value As Present Value is more than Face value, bond is selling at premium Required Return = 8% Present Value 1,000.00 Face Value 1,000.00 Present Value = Face Value As Present Value

is equal to Face value, bond is selling at par Required Return = 10% Present Value 863.73 Face Value 1,000.00 Present Value < Face Value As Present Value is less than Face value, bond is selling at discount Answer C C = Face Value x Coupon Rate* 6/12 C = 1000 x 0.08*6/12 C = $ 40 Number of years = 12 years *2 = 24 years Discount rate = 10% / 2 = 5% Year Cashflow Discount factor @ 5% Discounted Amount 1 40 0.952 38.10 2 40 0.907 36.28 3 40 0.864 34.55 4 40 0.823 32.91 5 40 0.784 31.34 6 40 0.746 29.85 7 40 0.711 28.43 8 40 0.677 27.07 9 40 0.645 25.78 10 40 0.614 24.56 11 40 0.585 23.39 12 40 0.557 22.27 13 40 0.530 21.21 14 40 0.505 20.20 15 40 0.481 19.24 16 40 0.458 18.32 17 40 0.436 17.45 18 40 0.416 16.62 19 40 0.396 15.83 20 40 0.377 15.08 21 40 0.359 14.36 22 40 0.342 13.67 23 40 0.326 13.02 24 1040 0.310 322.47 Present Value 498.49   ANSWER: CLICK REQUEST FOR  AN EXPERT SOLUTION