You purchased a Wal-Mart bond at par value of $10,000 few years ago with a coupo

Question

You purchased a Wal-Mart bond at par value of $10,000 few years ago with a coupon rate of 6% per year with quarterly interest payments. Immediately after receiving the twelve interest payment you have a business opportunity and decide to sell the bond. The bond still has four more years to redeem. Considering the low interest rates that the bond market has nowadays, and the high rating of a Wal-Mart paper, you will sell the bond at a price that yields 8% per year. What is your selling price? A foreign investor buys the bond at that price and holds the bond until maturity, what is the effective rate of return of the investor?

Explanation / Answer

quarterly interest rrate = 6/4 = 1.5%

selling price = 150*PVIFA(2,16)+10000/1.02^16 = 150*13.5777+(10000/1.02^16) = $9321.113

effective rate of return for the investor = (1.02^4)-1 = 8.24%

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