Question

A company has issued a 20 year bonds, with a face value of $50,000. Interest at 8% is paid quarterly. If an investor desires to earn 12%, compounded quarterly, what would be the purchase price of the bond?

Answer 1

Quarterly interest = $50,000 x (8%/4) = $1,000

Quarterly rate of return = 12%/4 = 3%

Number of quarters = 4 x 20 = 80

Purchase price ($) = Present value of future bond interests + Present value of face value

= 1,000 x P/A(3%, 80) + 50,000 x P/F(3%, 80)

= 1,000 x 30.2008** + 50,000 x 0.0940**

= 30,200.8 + 4,700

= 34,900.8

**From P/A and P/F Factor tables