Bonds Time Planning higher education: Starting at zero: 9a. You decide to purcha
ID: 2755255 • Letter: B
Question
Bonds Time Planning higher education: Starting at zero: 9a. You decide to purchase a zero coupon bond as a strategy to fund a year of college education. You estimate you will need $40,000 for a year of education. What is the price today of a 15 year zero coupon bond with face value $40,000 in a market with current market yield of 5.27% compounded annually? 9b. Suppose you need to sell the bond after holding it for 10 years. If the market price on the day you sell is $31,070.83, what is the market yield to maturity at the time of sale? please answer it with fiancee calculator with the wright answer
Explanation / Answer
9a. Price of bond today = face value * Present value factor on maturity
= $40000 * PV (n=15th year , yeild rate = 5.27%)
= $40000 * 0.46284
= $ 18514
PVIFA of the year of maturity = initial market value of bond / value in hands of inestor at maturity
= $ 18514 / $31070.83
= 0.59586
Rate of return PVIFA
5 % 0.61391
6% 0.55839
Difference 0.05552
Yeild = 5% + ( 0.61391 - 0.59586)/ (0.61391 - 0.55839) * 1%
= 5.325 %
YEAR PVF 1 0.949938 2 0.902383 3 0.857208 4 0.814295 5 0.77353 6 0.734805 7 0.69802 8 0.663076 9 0.629881 10 0.598348 11 0.568394 12 0.539939 13 0.512909 14 0.487231 15 0.46284