A $10,000 face value corporate bond with dividends paid every 12 months based on
ID: 1091228 • Letter: A
Question
A $10,000 face value corporate bond with dividends paid every 12 months based on an annual coupon interest rate of 10.0% was recently offered for purchase. The bond has 2 maturity dates,5 and 10years.At the end of 5 years,the investor receives half the face value(5,000) as a lump sum and the annual dividend from that point forward is paid on the remaining face value amount. At 10 years the remaining face value amount is paid. If the real desired annual MARR is 8.00% and annual inflation is expected to be 3.71%, what is the maximum amount to pay for the bond achieve the desired ROR?
Explanation / Answer
present value = 1000/(1 + 0.1171)^1 + 1000/(1 + 0.1171)^2 + + 1000/(1 + 0.1171)^3 + 1000/(1 + 0.1171)^4 + 1000/(1 + 0.1171)^5 + 5000/(1 +0.1171)^5 + 500/( 1 + 0.1171)^6 + 500/( 1 + 0.1171)^7 + 500/( 1 +0.1171)^8 + 500/( 1 + 0.1171)^9 + 500/( 1 + 0.1171)^10 + 5000/(1+0.1171)^10 = 895.18 + 801.34 + 717.34 + 642.14 + 574.83 + 2874.15 + 257.29 + 230.32 + 206.17 + 184.56 + 165.22 + 1652.15
= 9200.69
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