5. The Lawrence, Kansas school district is selling $500 bonds as a \'\'crowd-fun

Question

5. The Lawrence, Kansas school district is selling $500 bonds as a ''crowd-funding'' method to pay for wireless access in the oldest school buildings in town. The Kansa Legislature has reduced funding to all school districts in the state. You would like to purchase one of these bonds. Here are the rules for these bonds: a) They mature in 10 years, when the bond's face value is returned to you. b) They pay a 5% dividend which divided evenly and paid at the end of every quarter year. c) The dividend is compounded monthly. The City website claims that the investor will make 6%, compounded daily, on this bond investment. Is this true? Show this with calculation of the present worth of the investment. If the rate of return is not 6%, calculate the actual effective interest rate. Use a

Explanation / Answer

Solution:

Present Worth of investment of bonds

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Year to mature 10 Number of quarters each year 4 Total Periods 40 Interest each quarter 5%/12*3 1.25% Present value of Investment Present Value of Interest Interest each quarter 6.25 PVAF(1.25%,40 PERIODS) 31.3269 195.7931 Present value of redeemable value Maturity value 500 PVIF(1.25%,40 PERIODS) 0.6084 304.2 Present Value of Investment 499.9931

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