A company has issued a 20 year bonds, with a face value of $50,000 interest at 8% is paid quarterly. If an invest

A company has issued a 20 year bonds, with a face value of $50,000 interest at 8% is paid quarterly. If an invest

 

 

 

 

 

 

answer:

$34,900.80

Explanation:

Since the interest is paid quarterly, the bond interest rate per period is 2% (i.e 8% / 4),

The desired rate is 3% (i.e 12% / 4)

The number of time periods are 80 (i.e 4 × 20). H

Purchase price of the bond = 2% * $50,000 * [1 – (1+3%)-80 / 3%] + [$50,000 / (1+3%)80 ]

= 0.02 * $50,000 * [1 – (1.03)-80 / 0.03] + [$50,000 / (1.03)80 ]

= 0.02 * 50,000 * [(1 – 0.09398) / 0.03] + [(50,000 / 10.64)]

= (0.02 * 50,000 * 30.2) + 4699.25

= 34,899.25 (it is approximate to 34,900.80)

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