All-in-One PC and Monilor in one gives you a simg tps://quizlet.com/200200039/fi

Question

All-in-One PC and Monilor in one gives you a simg tps://quizlet.com/200200039/fin-3716-ch-6-fin-3716-ch-7-fin-3716-ch-8-flash-cards/ 3716 Ch. 6 FIN 3716 X This exam is due by Saturday at 11:55 pm. Please be sure to complete all questions on all pages before clicking the "Submit all and finish" button. You should show all your calculations/processes/explanation. The answer itself is NOT valid. This is a timed test: -You are allowed to take the Midterm Exam in 7 hours/420 minutes in one time setting. Question 1 15 pts (15 points) A bond pays $1.000 at the end of each year for 5 years plus an additional $5,000 when the bond matures at the end of 5 years. What is the most you would be willing to pay for this bond if your opportunity cost of capital is 5%?

Explanation / Answer

Answer

Present value of total cash flow is given by:

PV = C/(1+r) + C/(1+r)2 + C/(1+r)3 + C/(1+r)4 + C/(1+r)5 + FV/(1+r)5

Our opportunity cost = 5% Hence we want that present value which we get if instead of buying a stock we enjoy 5% of return of capital. Here r = 5/100 = 0.05 , C = 1000 and FV = 5000

Hence,

PV = 1000/(1.05) + 1000/(1.05)2 + 1000/(1.05)3 + 1000/(1.05)4 + 1000/(1.05)5 + 5000/(1.05)5

= $8247.1

Hence i would be willing to pay $8247.1 for this bond.

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