(Bond valuation) Enterprise, Inc. bonds have an annual coupon rate of 9 percent. The interest is paid semiannually and the bonds mature in 9 years. Their par value is $1 comma 000. If the market's required yield to maturity on a comparable-risk bond is 11 percent, what is the value of the bond? What is its value if the interest is paid annually?

Bond's value if the interest is paid semiannually is $887.54

Bond's value if the interest is paid annually is $889.25

Explanation:

Coupon payment = 1000 x 9% = $90 annually = $45 semiannually

Number of periods = n = 9 years x 2 = 18 periods

Yield to maturity = 11% annually = 5.5% semiannually

Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula

If Interest paid Semiannually

Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]

Price of the Bond =$45 x [ ( 1 - ( 1 + 5.5% )^-18 ) / 5.5% ] + [ $1,000 / ( 1 + 5.5% )^18 ]

Price of the Bond = $506.07 + $381.47 = $887.54

If Interest paid Annually

Price of the Bond =$90 x [ ( 1 - ( 1 + 11% )^-9 ) / 11% ] + [ $1,000 / ( 1 + 11% )^9 ]

Price of the Bond = $498.33 + $390.92 = $889.25

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