A bond has an $8,000 face value. It pays an annual nominal interest of 10 degree

Question

A bond has an $8,000 face value. It pays an annual nominal interest of 10 degree of its face value in semi annual installments starting at the end of the 1^st semi annual period. It is redeemable at its face value in 20 years. Draw a cash flow diagram showing bond payments. What is its present worth, PW, if the prevailing interest rates are 12% per year compounded quarterly If the bond still pays the 10% annual nominal interest rate but in 4 equal installments per year, starting at the end of the 1^st quarter period, Draw a new cash flow diagram showing the bond payments. What is the effective quarterly interest rate, assuming the prevailing interest rates are 12% per year compounded monthly, What is the bond worth now (i.e. Its present value in case c). If the prevailing interest rates remain the same. 12% per year compounded monthly, and I want to sell the bond at the end of 15 years, how much should I sell it for

Explanation / Answer

Fo calculatin PW use formula in excel

PV(12%/4,20*4,-400,-8000)= $12832.12

12% compounded quarterly so effective annual interest is 12%/4 and thus compounding period also change to 20*4,

Effective annual interest rate computed monthly= (1+0.12/12)^12-1=12.6825%

Effective quarterly interest rate= 12.6825/4= 3.1706%

PW= =PV(12%/12,20*12,-200,-8000)

PW= $18898.33

FV can be calculated as

FV(12%/12,15*12,-200,0)= Sell at $99916.04

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