Can someone please help me by showing how to work these questions all the way th
ID: 1099904 • Letter: C
Question
Can someone please help me by showing how to work these questions all the way through? I have the answers listed below after the questions themselves. Thanks so much.
1. Marianna is interested in a corporate bond that has a face value of $10,000. The bond matures in 5 years and pays a dividend rate of 5% spread out in equal semi-annual payments. Marianna requires an interest rate of 6% per year, compounded monthly on any investment she makes. Given this information, the most she should pay for the bond is closest to
Explanation / Answer
1. Semiannual dividend payment = 5%*10000/2= 250
Effective semiannual rate = (1+6%/12)^6 -1)= 3.04%
Price of bond = 250/(1+3.04%) +250/(1+3.04%)^2 + 250/(1+3.04%)^3 + 250/(1+3.04%)^4 +250/(1+3.04%)^5 + 250/(1+3.04%)^6 + 250/(1+3.04%)^7 + 250/(1+3.04%)^8 + 250/(1+3.04%)^9 + 250/(1+3.04%)^10 + 10000/(1+6%/2)^10 =$9542
2. Let monthly payment be x
Present value of monthly payment = 250,000
Number of payments = 20*12= 240
250,000 = x/(1+6%/12) + x/(1+6%/12)^2 + x/(1+6%/12)^3