5. What amount of endowment principal is required to support remaining cash requ

Question

5. What amount of endowment principal is required to support remaining cash requirements?

6. How much should the investor pay for the bond?

5. Suppose that a firm wishes to create an endowment for a Library. It will eam an interest of 10% per year Cash requirement are estimated to be $450,000 (to establish it), $80,000 per year indefinitely. Also $20,000 every five years and $45,000 every ten years for facilities replacement indefinitely a. What amount of endowment principal is required to support remaining cash 6, A $800,000 face-value bond matures in four years and pays 6% per year payable quarterly wants a 12% return per year compounded. An investor a. How much should the investor pay for the bond?

Explanation / Answer

Ans for 6)

Value of Bond=Sum of Discounted Cash flow till maturity

Value of Bond=(800*1.5%)/1.12^0.25+(800*1.5%)/1.12^0.5+(800*1.5%)/1.12^0.75+(800*1.5%)/1.12^1+(800*1.5%)/1.12^1.25+(800*1.5%)/1.12^1.5+(800*1.5%)/1.12^1.75+(800*1.5%)/1.12^2+(800*1.5%)/1.12^2.25+(800*1.5%)/1.12^2.5+(800*1.5%)/1.12^2.75+(800*1.5%)/1.12^3+(800*1.5%)/1.12^3.25+(800*1.5%)/1.12^3.5+(800*1.5%)/1.12^3.75+(800*1.5%)/1.12^4+800/1.12^4=660.61*1000=$660,610

Hence Investor should pay $660,610

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