Kebt Corporation's Class Semi bonds have a 12-year maturity and an 6.00% coupon paid semiannually (3% each 6 months),and those bonds sell at their $1,000 par value.The firm's Class Ann bonds have the same risk,maturity,nominal interest rate,and par value,but these bonds pay interest annually.Neither bond is callable.At what price should the annual payment bond sell?

Question

Quizplus · Accepted Answer

To find the price of the annual payment bond, we need to calculate the present value of the semiannual payments and the principal using the same 6.00% nominal interest rate and 12-year maturity.

For the semiannual payment bond:
N = 24 (12 years x 2 semiannual periods)
I/Y = 3
PMT = 30 (1,000 x 6% / 2)
FV = 1,000
Solving for PV, we get $1,000 as expected.

For the annual payment bond:
N = 12 (12 years x 1 annual period)
I/Y = 6
PMT = 60 (1,000 x 6%)
FV = 1,000
Solving for PV, we get $992.49.

Therefore, the Class Ann bonds should sell at $992.49 to provide the same yield as the Class Semi bonds.

Kebt Corporation's Class Semi Bonds Have a 12-Year Maturity and an 6.00