Question

Class: Engineering Econ and Planning

PLEASE PROVIDE ALL NECESSARY FORMULAS

Harley believes that investing in bonds is a good option for the current economic environment. She is assessing whether to invest in a bond with a face value of $20K and maturity of 20 years. The bond has a coupon interest of 4% payable quarterly. Question 5.1. (10 points) If Harley expects to make a 1.5% return per quarter on her investments, should she invest in the bond?

Answer 1

Coupon interest per quarter = 4% / 4 = 1%

Coupon amount per quarter (A) = 20,000 * 0.01 = $200

n = 4 * 20 years = 80

Present value of the bond = A(P/A, i, n) + F(P/F, i, n)

                                          = 200(P/A, 1.5%, 80) + 20,000(P/F, 1.5%, 80)

                                          = 200(46.407) + 20,000(0.3039)

                                          = 9,281.4 + 6,078

                                          = $15,359.4

Since the present value is less than the face value of the bond, therefore, Harley should invest in the bond. It means she will invest $15,359.4 now and receive $200 quarterly for 20 years and at the end of 20 years she will $20,000. So, the investment is beneficial for her.