Question

What’s the best project for problem 2

2. [20] A S5,000 corporate bond pays S100 quarterly, and has six years to maturity. If this bond is selling for $5,500.76 what is the interest rate that the market has for this bond?

Answer 1

The answer for second question has been answered which is related to the bonds. But 'best project' has also been asked which is a part of another question. Therefore, there are some confusions in the question. Since Chegg's guidelines ask for answering the first question mentioned, the answer to the bond-related question has been provided.

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A $5000 bond is there which provides $100 quarterly. To maturity, there are 6 years or 24 quarters (= 6 years multiplied by 4 quarters). Also, the bond sells for $5500.76.

It means that the Present Value (PV) is given to be $5500.76, $100 is the quarterly value which needs to be converted from its annual value to the present value and $5000 is the fixed value which is also supposed to be converted to the PV. Using this information,

PV = Fixed cost (P/F, i%, n) + Quarterly value (P/A, i%, n)

5500.76 = 5000 (P/F, i%, 24) + 100 (P/A, i%, 24)

Using the compounding table, the value of 'i' that satisfies the above equation is 1.5%. Thus, for a quarter, the interest rate is 1.5% and for a year, it is equal to 6% (= 1.5% multiplied by 4).

Therefore, the interest rate that the market has for this bond is 6%.