Regatta, Inc. Bond Valuation Calculation

How to Calculate the Price of Regatta, Inc. Bond

Regatta, Inc., has six-year bonds outstanding that pay an 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. How much will you be willing to pay for Triumph's bond today? Assume annual coupon payments.

Final answer:

To find the price one would be willing to pay for the bond today, calculate the present value of the bond's future cash flows, which consist of the coupon payments and the face value repayment at maturity.

Explanation:

The question asks how much one would be willing to pay for a Regatta, Inc. bond today, knowing it has a 6-year maturity, a coupon rate of 8.25%, and a yield to maturity of 6.875%. To determine the bond's price, we need to calculate the present value of the bond's future cash flows which include annual interest payments and the repayment of the bond's face value at maturity.

To solve this, you use the formula for present value of an annuity to calculate the present value of the coupon payments, and the formula for present value of a lump sum to calculate the present value of the face value of the bond. The sum of these two present values gives the price one would be willing to pay for the bond today.