On January 1, 2005, Systil Corporation issues $50 million, 10-year bonds with a coupon rate of 10%. Interest is payable annually at the end of the year. If the required return on bonds of similar risk at January 1, 2006, is 8%, what will be the price of the bonds be at this date?
A)$56.71 million
B)$56.25 million
C)$44.24 million
D)$43.86 million

Question

Quizplus · Accepted Answer

The price of the bond will increase because the coupon rate (10%) is higher than the new required return (8%). To calculate the new price, we use the formula for the present value of an annuity (for the remaining 9 years of interest payments) plus the present value of the principal amount ($50 million) to be received at the end of the 10th year. The calculation is as follows: Present Value of Annuity (Interest Payments) = $5 million * [(1 - (1 + 0.08)^-9) / 0.08] = $33.71 million (approx.) Present Value of Principal = $50 million / (1 + 0.08)^9 = $23 million (approx.) Total = $33.71 million + $23 million = $56.71 million.

On January 1, 2005, Systil Corporation Issues $50 Million, 10-Year