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!