A) Marigold Merchants has an outstanding issue of $1,000 par value bonds with an 8% coupon interest rate. The issue pays interest annuallly and has 15 years remaining to its maturity date. Bonds of similar risk are currently yielding a 10% rate of return. What is the value of these Marigold Merhant bonds?

Is the bond selling at a discount or premium, and why?

b) Marigold Merchants also has an outstanding issue of $1,000 par value bonds with a 12% interest rate. The issue pays interest semiannually and has 10 years remaining to maturity. Bonds of similar risk are currently selling to yield a 10% rate of return. What is the value of these Marigold Merchants bonds?

Is the bond selling at a discount or premium, and why?

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Solution:

a)
No. of coupon payments left=n=15
Requited rate of return=r=10%
Coupon Amount=C=1000*8%=$80
Maturity Amount=M=$1000

The Fair value of a bond is given by
Value of bong = Present value of annual coupon payments + Present value of ...

Solution Summary

Solution describes the steps to estimate value of coupon paying bond. It also determines whether the bond is selling at premium or at discount.

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