Giant Electronics: Let's Calculate Bond Prices!
What is the calculation of bond prices for Giant Electronics' 20-year bonds with a coupon rate of 7.8 percent?
Based on the given data, what will the bonds sell for today?
Answer:
The bonds will sell for $1,085 today.
Giant Electronics is issuing 20-year bonds with a 7.8 percent coupon rate that pays coupons semiannually. To calculate the price of the bonds, we need to consider the given data:
Years to maturity (n) = 20
Coupon rate (C) = 7.8%
Frequency of payment (m) = 2
Semiannual coupon = $1,000 × (0.078/2) = $39.00
Current market rate (i) = 7%
Using the formula for the price of the bond:
Price of bond = 0.078 x 1000 x (1 – (1 + 0.07)^-20/0.07 + 1000/ (1.07) ^20
Price of bond = 78 x 10.60 = 826.33 + 258.42 = $1,084.75
Therefore, based on the calculation, the Giant Electronics' 20-year bonds with a coupon rate of 7.8 percent will sell for $1,085 today. It's a great deal for investors looking for steady returns!