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gulaghasi [49]
3 years ago
13

Claire purchases an eight-year callable bond with a 10% annual coupon rate payable semiannually. The bond has a face value of 3,

000 and a redemption value of 2,800. The purchase price assumes the bond is called at the end of the fourth year for 2,900, and provides an annual effective yield of 10.0%. Immediately after the first coupon payment is received, the bond is called for 2,960. Claire’s annual effective yield rate is i. Calculate i.
Business
1 answer:
Liula [17]3 years ago
4 0

Answer:

12.41%

Explanation:

yield to call = {coupon + [(call value - market value)/n]} / [(call value - market value)/2]

0.05 = {150 + [(2,900 - market value)/8]} / [(2,900 - market value)/2]

0.05 x [(2,900 - market value)/2] = 150 + [(2,900 - market value)/8]

0.05 x (1,450 + 0.5MV) = 150 + 362.5 - 0.125MV

72.5 + 0.025MV = 512.5 - 0.125MV

0.15MV = 440

MV = 440 / 0.15 = $2,933.33

Claire's total returns = $150 (coupon) + ($2,960 - $2,933.33) = $176.67

Claire's return on investment = $176.67 / $2,933.33 = 6.02273%

effective annual yield = (1 + 6.02273%)² - 1 = 12.41%

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<h3>What is NPV?</h3>

NPV is an abbreviated form of Net present value and computed by deducting the cash outflows from cash inflows at the present value.

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Cash flow of year 2: $10,000

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PV of year 1 = Cash inflow of year 1 / (1+ interest rate)^ 1

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PV of year 3= Cash inflow of year 1 / (1+ interest rate)^ 3

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Step-2 Computation of total amount of PV of cash inflows:

\rm\ PV \rm\ of \rm\ cash \rm\ inflows = \rm\ PV \rm\  of \rm\  year \rm\  1 + \rm\  PV \rm\ of \rm\ year \rm\ 2 + \rm\ PV \rm\ of \rm\ year \rm\ 3\\\rm\ PV \rm\ of \rm\ cash \rm\ inflows =\$9,346 + \$8,735 + \$1,633\\\rm\ PV \rm\ of \rm\ cash \rm\ inflows =\$19,714

Step-3 Computation of NPV:

\rm\ NPV=\rm\ PV \rm\ of \rm\ cash \rm\ inflows- \rm\ Cost \rm\ of \rm\ investment\\\rm\ NPV=\$19,714-\$20,000\\\rm\ NPV=\$ (286)

Therefore, the NPV comes out to be a negative amount of 286, and hence, the company should not accept the project.

Learn more about the net present value in the related link:

brainly.com/question/14015430

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