A serial bond issue of $10,000 is offered on May 1, 2010 paying 8% annually. Fac

Question

A serial bond issue of $10,000 is offered on May 1, 2010 paying 8% annually. Face value of the bonds is $500 each, and matures in 4 years.

Prepare a repayment schedule for this issue?

What would an investor pay if he or she planned to buy one of these bonds on May 1, 2011, seeking a 9% return on investment?

Explanation / Answer

Repayment schedule : on May 1, 2011 -> $10000*0.08 = $800 on May 1, 2012 -> $10000*0.08 = $800 on May 1, 2013 -> $10000*0.08 = $800 on May 1, 2014 -> $10000*0.08 + 10000= $10800 (ANSWER) Let P be price, the investor willing to pay for a bond on May 1, 2011 expecting return, k of 9%. This should be equal to PV of future cash flows FOR NEXT 3 YEARS AND REDEMPTION. So, P = 500*0.08(1.09^3-1)/(0.09*1.09^3) + 500/1.09^3 => = 487.34 ($) (ANSWER)

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