A 10-year bond with the face value of $20,000 is offered for sale at $ 17,000 in
ID: 2754856 • Letter: A
Question
A 10-year bond with the face value of $20,000 is offered for sale at $ 17,000 in the market. The nominal annual interest rate for the bond is 8%, paid quarterly. This bond is now 5 years old. Y iu are considering the offer price $17,000. Calculate the effective annual rate of return within a 3% point range when you purchase it at $17,000 and keep the bond to the maturity 5 years hence. Is that offer price $17,000 acceptable? Your MARR is 5% per year. Calculate the effective annual interest rate within a 3% point range if you purchase the bond at $16,500 instead of $17,000.Explanation / Answer
(a) Present Worth (PW)
(i) Optimistic scenario:
PW ($) = - 250,000 + 25,000 x PVIFA (6%, 30 years)
= - 250,000 + 25,000 x 13.7648 [From PVIFA table]
= - 250,000 + 344,120
= 94,120
(ii) Most likely scenario
PW ($) = - 250,000 + 20,000 x PVIFA (6%, 30 years)
= - 250,000 + 20,000 x 13.7648 [From PVIFA table]
= - 250,000 + 275,296
= 25,296
(iii) Pessimistic scenario
PW ($) = - 250,000 + 13,000 x PVIFA (6%, 30 years)
= - 250,000 + 13,000 x 13.7648 [From PVIFA table]
= - 250,000 + 178,942.4
= - 71,057.6
(b)
Mean annual savings = $(25,000 + 20,000 + 13,000) / 3 = $58,000 / 3 = $19,333.33
(c)
PW ($) = - 250,000 + 19,333.33 x PVIFA (6%, 30 years)
- 250,000 + 19,333.33 x 13.7648 [From PVIFA table]
= - 250,000 + 266,119.42
= 16,119.42
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.