Question

Jane Smith, MD, has had a gr eat year in her pediatrics practice and has cash that she wants to invest. Her financial adviser suggests she buy a seven-year, $1,500 par value bond with an annual coupon rate of 10 percent and three years remaining to maturity. Dr. Smith decides to explore her options. She discovers that new, similarly risky bonds have an average annual rate of return of 12 percent. Bank certificates of deposit are returning 5 percent annually on average while a mutual fund investing in high-risk-growth stocks has an average annual rate of return of 20 percent. If Dr. Smith follows her financial adviser’s advice, what is the maximum amount she should pay for the bond? Explain your answer.

Answer 1

ANSWER:

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

COUPON RATE IS 10% AND CURRENT RATE ON SIMILAR BOND IS 12%, SO BOND WILL BE AVAILABLE AT LOWER THAN FACE VALUE.

AS WE HAVE CALCULATED, THE MAXIMUM SHE SHOULD PAY FOR BOND IS : 1427.95

- Home File Insert Page Layout Formulas Data Review Σ AutoSum" Α BOND Microsoft Excel (Product Activation Failed) View Add-ins , Wrap Text General E TTE E Merge & Center $ % . 8. Conditional Format Alignment Number Da Copy Calibri -11 -A BIU. B. Font N A == ESS Paste Insert Delete Format Cell Formatting as Table Styles Styles 2 Clear Sort & Find & Filter Select Editing Cells н 1500 Clipboard 0971 А 959 960 961 962 963 964 965 ANSWER 966 967 968 FACE VALUE YEARS LEFT COUPON COUPON ($) YTM PRICE OF BOND 10% 150.00 (1500 X 10%) 12% 1427.95 EXCEL = PV(C964,C961,-C963,-C960) 969 970 971 972 973 974 975 976 977 H I BIDDING, UNDERWRITING EUAC AW PM LIFELP, IP, MRP, INFLATION YIELD WARRAN Trefund bond CLEAN INVOICE PRICE Sheet1 Sheet3 BANKING NOTE erences Sheet4 AD Ree 130% 0 + . 24 % ENG