Question

Question 6 (12 points) 6. A $10,000 bond that pays 10% compounded quarterly and matures in 5 years is for sale. What is the maximum that should be paid for the bond if 40% compounded quarterly is required on the bond?

Answer 1

Solution:-

Quarterly bond interest = $10,000 x 10% x (1/4) = $250

Number of quarters = 5 x 4 = 20

Quarterly required return = 40% x (1/4) = 10%

Bond Price ($) = Present value of bond interest payments + Present value of redemption price (face value)

= 250 x PVIFA (10%, 20) + 10,000 x PVIF (10%, 20)

= 250 x 8.514** + 10,000 x 0.1486**

= 2128.5 + 1486

= 3614.5