EXAMPLE

For facts in Example 4.4. assume (i) the bonds of the firm pay interest semiannually, (ii) the required stated return is 14 per cent for similar-risk bonds that also pays half-yearly interest. Compute the value of the bond

Solution

Substituting the values in Equation 4.4. we get,

1

the value of a bond selling at a discount is lower when semiannual interest used compared to annual interest, For bond selling at a premium, the value with semiannual interest is greater than with annual interest.

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