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Goshia [24]
1 year ago
15

A bond pays $1000/year for 5 years. the price of the bond is $4,500. should you buy the bond? if not, what is the maximum price

you would pay? what went into your decision?
Business
1 answer:
aksik [14]1 year ago
3 0

The maximum price to be paid for the bond at a 5% required rate of return is $4,329.48.

Let us have a required rate of return of 5%.

The decision to buy the bond will be based on present  value of cash inflows:

present value of cash inflows = A* [1-(1+r)^(-n)]/r

here

A = $1000 per month

r=5%=>0.05

n=5 years.

$1000*[1-(1.05)^(-5)]/0.05

=>$1000*4.329476.

=>$4,329.48.

Since the present value of cash inflows is lower than the price of the bond , we need not purchase the bond.

The maximum price to be paid for the bond at 5% required rate of return is $4,329.48.

Our decision is based on the required rate of return of 5%, the higher the required return the lower will be the amount to be paid for the bond.

Learn more about rate of return here: brainly.com/question/3578105

#SPJ4

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