Indiana University is issuing a zero-coupon bond to fund the new Academic Health Sciences Building on campus. The bonds will have a maturity of 50 years and a par value of $1,000. The current yield on similar bonds is 11%. What is the expected price of this bond, using the semiannual convention?

Indiana University is issuing a zero-coupon bond to fund the new Academic Health Sciences Building on campus. The bonds will have a maturity of 50 years and a par value of $1,000. The current yield on similar bonds is 11%. What is the expected price of this bond, using the semiannual convention?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 15P

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Concept explainers

Debenture Valuation

A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.

Note Valuation

It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:

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Indiana University is issuing a zero-coupon bond to fund the new Academic Health Sciences
Building on campus. The bonds will have a maturity of 50 years and a par value of $1,000. The
current yield on similar bonds is 11%. What is the expected price of this bond, using the
semiannual convention?

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