Question

13. (10.0 pts) Eric just purchased a $10,000 bond today. The bond rate is 8% per year payable semi-annually. He will receive the 1st interest payment 6 months after purchasing the bond. He will sell the bond at maturity, immediately after receiving his 8th interest payment. Draw the cash flow diagram of the bond transaction, from the issuing organization's perspective, using dollar amounts where they are known and using $P to represent the purchase price of the bond and $F the selling price of the bond (IF they are NOT known). Note: You DO NOT have to solve for the unknowns, even though you know how to solve. This is a CFD question only.

Answer 1

Face value of bond=F=$10000

Interest per period=i=10000*8%/2=$400 per semi annual (6 months)

Number of periods=n=8

$400' $400 $4000 $400 $400 9400 9400 9400 $10000V