Anyone able to help me with this? You wish to buy a Bond from Person X on July 1

Question

Anyone able to help me with this?

You wish to buy a Bond from Person X on July 1st. 2020 at 9:00am. The bond is described as follows Z (face value) = $1000 N = 10 years starting from Jan 1st, 2015. So "one year" is from Jan 1s! to Dec 31st (of a calendar year). C (redemption value) = $800 This amount will be given to the (current) owner of the bond on Dec 31st. 2024 at 11:59pm r = 10% per year calculated on the face value of the bond For each year, the interest is given to the owner of the bond on Dec 31s1 at 11:59pm that year So the first interest payment is made on Dec 31st, 2015 and the last interest payment is made on Dec 31st 2024 You have an investment option in which you can deposit money on any day between 10:00am and 11:00am. The interest is calculated on the money in your account at 11:30am each day. The interest rate is 0 02%. What is the present worth of the bond for you? The present worth of the bond (in your eyes) will determine what is the maximum amount of money you're willing to pay Person X to buy the bond Hint: If you're going to buy the bond, then you will buy it on July 1st. 2020 The present worth of the bond is essentially the monetary value of the bond (with respect to you) on July 1st. 2020 at 9:00am (the time is very important for this question). In order to calculate this, you must figure out what is the present worth of all cash inflows, with respect to the bond, that occur after July 1st. 2020 (because you will receive them if you buy the bond). The present worth must be calculated using the rate given for the investment option (Why?). Do not forget to take the time of (supposed) purchase into account Approximately $964 42 Approximately $984.42 Approximately $994.42 Approximately $974.42

Explanation / Answer

coupon = 0.1*$1000 = $100

required rate of interest = r

(1.0002)^365 = (1+r)

r = (1.0002)^365 - 1

r = 7.57%

Value of the bond on Jan 1st, 2021= 100/(1.0757) + 100/(1.0757)^2 + 100/(1.0757)^3 + 100/(1.0757)^4 + 800/(1.0757)^4

= 931.89

Present value of the bond = 100/(1+.0757/2) + 931.89/(1+.0757/2) = $994.26

C. Approximately $994.42

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