Question

1-(a) Consider a bond with a $1,000 face value and a 10 percent coupon rate with semiannual payments matures in 15 years. Determine the value of the bond to a friend of yours with a required rate of return of 13% (2 points) 1-(b) A zero coupon bond with a risk similar to part (a), is $1,000 and matures in 15 years. Your friend asks you which bond she should invest in, the zero coupon selling for $120. The bond has a face value of bond or the bond in part (a). Which bond do you recommend, and why? (3 points)

Answer 1

1-(a)

Function Arguments X PV 13%/ 2 Rate 0.065 Nper 30 15*2 Pmt 50 100/2 = Fv 1000 1000 = Type number -804.1198614 Returns the present value of an investment: the total amount that a series of future payments is worth now. Fv is the future value, or a cash balance you want to attain after the last payment is made. Formula result $ -804.12 OK Cancel Help on this function

Hence, Bond value is $804.12

1-(b)

Function Arguments X RATE Nper 15 15 Pmt = 0 0 Pv 120 -120 1000 =1000 Fv Туре number 0.151828757 Returns the interest rate per period of a loan or an investment. For example, use 6% / 4 for quarterly payments at 6% APR. Fv is the future value, or a cash balance you want to attain after the last payment is made. If omitted, uses Fv 0 Formula result 15.18% OK Cancel Help on this function

Zero coupon bond should be purchased. It has higher return.