You bought a bond five years ago for $880 per bond. The bond is now selling for

Question

You bought a bond five years ago for $880 per bond. The bond is now selling for $860. It also paid $65 in interest per year, which you reinvested in the bond. Calculate the realized rate of return earned on this bond. (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

____

BSW Corporation has a bond issue outstanding with an annual coupon rate of 7.2 percent paid quarterly and four years remaining until maturity. The par value of the bond is $1,000. Determine the fair present value of the bond if market conditions justify a 15.5 percent, compounded quarterly, required rate of return. (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Realized Rate of Return = ( P1 - P0 + Any Income ) * 100 / P0

Realised Rate of Return = ($860 - $880 + $65)*100 / $ 880

Realised Rate of Return = 5.114%.

It is Assumed the the interest is recievd per year are reinvested in the same year. Hence we recieved $65 at the end of five year which were taken in calculation.

B. Fair present value of Bond = Interest * PVAF ( R , n year ) + Maturity * PVF ( R , n year)

Here,

When we quarterly compounded then,

R is divided by 4 and Years are multiply by four and coupn rate is also divided by 4.

Therefore,

Fair value of bond = $1,000 * 7.2% / 4 * PVAF ( 15.5% / 4 , 4 * 4) + $1,000 * PVF ( 15.5% / 4, 4*4)

Fair Value of bond = 18 * PVAF ( 3.875% , 16 years) + 1000 * PVF ( 3.875% , 16 years)

Fair value of bond = 18 * 11.7605 + 1,000 * 0.544

Fair Value of Bond = $ 211.689 + 544

Fair value of Bond = $ 755.689

If you have any query related to above answer then you can ask me in a comment.

My priority is yours satisfaction.

Thanks

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.