Corporations issue bonds to raise capital for investments. The face value of a b
ID: 2762009 • Letter: C
Question
Corporations issue bonds to raise capital for investments. The face value of a bond is the amount that the owner of the bond will receive when the bond matures. A bond typically pays interest (sometimes called dividends) to the bondholder until maturity. Suppose that a 510,000 (face value) bond pays 6% interest quarterly (which means 1.5% of the face value per quarter), beginning exactly one quarter from today. Suppose further that the bond matures exactly 10 years from now. If this bond is purchased today, the purchaser will receive interest (or a dividend) of SI50 each quarter for the next 40 quarters, plus $10,000 40 quarters from nowr. If the investor's MARR is 16%, compounded quarterly, what is the maximum amount that the investor should pay today for this bond? Note that the 6% interest rate is used only to calculate the quarterly interest (dividend) payment to the bondholder. The investor's MARR is used to calculate the PW of the bond.Explanation / Answer
The cash flows from the bond will be = PV of dividend for 40 quarters + PV of the Face value of the bond after 40 quarters
The rate of interest to be used shall be 16% /4 = 4%
PW of the bond = 150 PVIFA (4%,40) + 10,000 PVIF (4%,40)
PW = 2874.60 is the value of bond today.