03.03-PR003 You wish to purchase a $1,000 bond from a friend who needs the money. There...

Question

Question

03.03-PR003 You wish to purchase a $1,000 bond from a friend who needs the money. There are 7 years remaining until the bond

business economics

Answer 1

Answer #1

Number of quarters = 7 x 4 = 28

Quarterly (nominal) interest rate = 16%/4 = 4%

Let Quarterly coupon interest be C. Then

Bond price ($) = PC of quarterly coupon interest payments + PC of face value

750.08 = C x P/A(4%, 28) + 1,000 x P/F(4%, 28)

750.08 = C x 16.6631 + 1,000 x 0.33348

750.08 = C x 16.6631 + 333.48

C x 16.6631 = 416.6

C = $25

Annual bond coupon interest = C x 4 = $25 x 4 = $100

Annual bond interest rate = $100 / $1,000 = 0.1 = 10%

Answer 2

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