Calculating the Price of Bonds for Regatta Ltd
What should the price of Regatta Ltd's bonds be today?
Regatta Ltd has six-year bonds outstanding that pay an 8.25 percent coupon rate with a par value of $1000. Investors buying the bond today can expect to earn a yield to maturity of 6 percent. What should the company's bonds be priced at today?
A. $923
B. $1,110
C. $1,014
D. $972
Answer:
Regatta Ltd's bonds should be priced at $1,110 today. The correct option is B.
Explanation:
The price of Regatta Ltd's bonds with a coupon rate of 8.25 percent, a par value of $1,000, and a yield to maturity of 6 percent is calculated using present value formulas to be approximately $1,110.
The question requires determining the current price of Regatta Ltd's bonds with specific bond characteristics. The process involves discounting the future cash flows (interest payments and principal amount) back to the present value at the yield to maturity rate of 6 percent.
The annual interest payment (coupon payment) for the bond can be calculated as 8.25 percent of the par value, which equals $82.50. Since the coupon rate is higher than the yield to maturity, the bond will be priced above its face value.
By applying the formula for the present value of an annuity for interest payments and the present value of a lump sum for the principal repayment, we can find that the bond's price today is $1,110.
Therefore, the correct answer to the question is that Regatta Ltd's bonds should be priced at $1,110 today.