Question

Ten bonds are purchased for $8,310.93 and are kept for 5 years. The bond coupon rate is 8% per year, payable semi-annually. Immediately following the owner's receipt of the last coupon payment, the owner sells each bond for $50 less than its par value (price discount). The owner will invest in the bonds if the effective annual yield is at least 10%.

Q: What is the face value of each bond?

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

1 Answer Nm 3 Present Value = ((Face Value - 500) * Present value factor(5%,10)) + (Face value *4%*Present value annuity (5%,10)) 4 = ((X-500)*(1/1.05410)) + (X*4%* ((1-(1.05)--10)/.05)) 5 = ((X-500)*.613913) + (X*4%*7.721735) 6 8310.93 = .613913X - 306.9566 + .308869X 7 8310.93+306.97 = .922783X 8 8617.89/.922783 = X 9 $ 9340 = X 10 11 So the Face Value of Per Bond = $ 9340/10 12 = $ 934 (rounded off to 0 decimal places) 13 14 So the correct answer is 15 $ 934 (rounded off to 0 decimal places) 16 17 18