Answer: 9 Subject: Bond Kayla is considering investing in a specific bond with a

Question

Answer: 9 Subject: Bond Kayla is considering investing in a specific bond with a face value of $10,000. The bond pays an interest of 8% payable quarterly. If she expects to make a 2.2 % return per quarter in this investment and if the bond matures in 20 years, the most she can pay for the bond is? Answer format: S xxxx ed out of Answer: on 10 Endowment Kelly and Sam, both graduated from an elite engineering program irom ihe South have decided to set up an endowment after celebrating their 25th wedding red

Explanation / Answer

9.

Market value of bond = Present value of coupon payments + Present value of face value of bond

Quarterly coupon payment of bond = $10,000 *8% *1/4 = $200

Maturity of bond = 20 years

Number of Quarterly coupon payments = 20 years * 4 = 80

Quarterly market interest rate = 2.2% = 0.022

Present value of annuity = Annuity amount*{1-(1+r)-n}/r

Present value of Quarterly coupon payments = $200*(1-1.022-80)/0.022 = $7,496.74

Present value of face value of bond = $10,000/1.02280 = $1,753.59

Market value of bond = $7,496.74 + $1,753.59 = $9,250.33

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