Question

In September 2000 the Pullman Group arranged a bond issue for the estate of the late Marvin Gaye. The collateral on the bonds (and source of cash flow for interest and principal payments) consisted of future royalties from classic songs such as "What's Going On," and "I Heard It Though The Grapevine." The bond issue had a $1,000 face value and a coupon rate of 5%. If the bond matures in 26 years, pays semiannual coupons, and the yield to maturity is 6%, what will the bond sell for

Answer 1

Answer:

The bond will sell for the amount of $869.17

Explanation:

According to the given data coupon amount = 50/2 = 25

Therefore, in order to calculate the selling price of the bond we would have to make the following calculation:

selling price of the bond = 25 * PVIFA(3%,52) + 1,000 * PVIF(3%,52)

selling price of the bond= 25 * 26.1662 + 1,000 * 0.2150

 selling price of the bond= $869.17

The bond will sell for the amount of $869.17

Answer 2

The bond will sell for $869.17, if the bond matures in 26 years, pays semiannual coupons, and the yield to maturity is 6%.

What is the present value of annuity factor?

PVIFA is an abbreviation of the Present Value Interest Factor of Annuity. It is an idea based on the time value of money; the money you have now is worth more than the same amount of money a few years from now.

As per the given information:

$\rm\,By \;the \; amount \;of \;coupon \;data \; provided \; = \dfrac{50}{2} = \ 25$

Therefore, in order to calculate the selling price of a bond we will need to do the following calculations:

$\rm\,Bond \; sale \;price = 25 \times PVIFA (3\%, 52) + 1,000 \times PVIF (3\%, 52)\\\\Bond sale price = 25 \times 26.1662 + 1,000 \times 0.2150\\\\ Bond sale price = \ 869.17$

Hence, the bond will sell for $869.17

To learn more about present value of annuity factor, refer:

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