How much would you pay for a 15 year bond with a semiannual coupon rate of 6%, and a par value of $15,000 if you want a 14% percent annual return on your investment? What would be the value of the coupons and principal to you?
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A. B. C. D. E.E
The semiannual coupon payment would be 0.06 x 15000 = $900. Using Appendix C of "Investment Analysis and Portfolio Management," by Reilly and Brown, one sees that the present value of annuity of $1 for 30 periods at a required rate of 7% (half of 14%) would be 12.410. The present value of the coupon payments is therefore 900 x 12.410 = $11,169. Using the same appendix, one sees that the present value of $1 after 30 periods at a required rate or 7% is 0.1314. The present value of the principal payment is therefore 15000 x 0.1314 = $1,971. The total value of the bond to you would be 11169 + 1971 = $13,140.