Add a cash flow diagram to it and a detailed solution and show the formula you u
ID: 2464103 • Letter: A
Question
Add a cash flow diagram to it and a detailed solution and show the formula you used
You purchased a $10,000 face value commercial bond for $9,000 on June 1, 1991. The bond pays $500 interest at the end of each six months. It is now June 1, 1992. Thus, you have already received two $500 payments. The bond matures in five more years on May 31, 1997.
(a) What is the bond (or coupon) interest rate?
(b)What return (interest rate) are you earning on your bond?
(c) What is the bond worth today, if 8% is an acceptable value for MARR?
Explanation / Answer
Answer
Answer (a)
What is the bond (or coupon) interest rate?
Bond Coupon interest rate = Yearly interest/ Face value
= ( $ 500 + $ 500) / $ 10,000
= $ 1000 / $ 10,000
Bond Coupon interest rate = 10% p.a.
Answer (b)
What return (interest rate) are you earning on your bond?
Return earned on bond = Yearly interest earned / Investment
= ($ 500 + $ 500) / $ 9000
= $ 1000 / $ 9000
Return earned on bond = 11.11% p.a.
Answer (c)
What is the bond worth today, if 8% is an acceptable value for MARR?
Figures in $
Year
Interest
Redemption price
Cash flow
Disc Rate : 4% (half yearly)
Present value
A
B
C
D
A+B
C*D
0.5
500
500
0.961538
480.7692
1
500
500
0.924556
462.2781
1.5
500
500
0.888996
444.4982
2
500
500
0.854804
427.4021
2.5
500
500
0.821927
410.9636
3
500
500
0.790315
395.1573
3.5
500
500
0.759918
379.9589
4
500
500
0.73069
365.3451
4.5
500
500
0.702587
351.2934
5
500
10000
10500
0.675564
7093.424
Net present value
10811.09
Answer : if 8% is an acceptable value for MARR, the bond worth today is $ 10811.09.
Figures in $
Year
Interest
Redemption price
Cash flow
Disc Rate : 4% (half yearly)
Present value
A
B
C
D
A+B
C*D
0.5
500
500
0.961538
480.7692
1
500
500
0.924556
462.2781
1.5
500
500
0.888996
444.4982
2
500
500
0.854804
427.4021
2.5
500
500
0.821927
410.9636
3
500
500
0.790315
395.1573
3.5
500
500
0.759918
379.9589
4
500
500
0.73069
365.3451
4.5
500
500
0.702587
351.2934
5
500
10000
10500
0.675564
7093.424
Net present value
10811.09
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