1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
velikii [3]
3 years ago
6

An investor is contemplating the purchase of a 20-year bond that pays $50 interest every six months. the investor plans to hold

the bond only for 10 years, at which time she will sell it in the marketplace. she requires a 12 percent annual return but believes the market will require only an 8 percent return when she sells the bond 10 years from now. assuming she is a rational investor, how much should she be willing to pay for the bond today
Business
1 answer:
irinina [24]3 years ago
4 0

Answer: The investor should be willing to pay <u>$927.68 </u>for the bond today.

We in need to compute the price at which the investor can sell the bond in year 10 (Y10).

The price of the bond in year 10 will be the present value of the coupons over the remaining life of the bond and the maturity value of the bond after 20 years.

We have

Coupon  Value (C )                     $50.00


No. of coupons remaining (n)           20

Expected YTM in year 10                 0.08


Expected semi annual  YTM in year 10      \frac{0.08}{2} =0.04

Face (Maturity) Value of the bond (MV)    $1,000.00


The bond price in year 10 will be

\mathbf{Bond Price_{Y10}=C*\left ( \frac{1-(1+r)^{-n}}{r}\right )+\frac{MV}{(1+r)^{n}}}

Substituting the values we get,

Bond Price_{Y10}=50*\left ( \frac{1-(1+0.04)^{-20}}{0.04}\right )+\frac{1000}{(1+0.04)^{20}}

Bond Price_{Y10}=50*\left (13.59\right )+\frac{1000}{2.19}

\mathbf{Bond Price_{Y10}= 679.52+ 456.39 = 1,135.90}

<u>Hence the investor can expect to sell the bond in year 10  at $1,135.90.</u>

Now, we'll calculate the price the investor is willing to pay for the bond. The investor can expected to pay the Present Value of the coupons she'll receive over 10 years and the selling price of the bond 10 years from now. We discount the cash flows at the rate of return the investor expects.

We have

Coupon  Value (C )                     $50.00


No. of coupons remaining (n)           20

Expected rate of return                          0.12

Expected semi annual  rate of return          \frac{0.12}{2} =0.06

Selling Price of the bond (SP)                $1,135.90

\mathbf{Bond Price=C*\left ( \frac{1-(1+r)^{-n}}{r}\right )+\frac{SP}{(1+r)^{n}}}

Substituting the values we get,

Bond Price=50*\left ( \frac{1-(1+0.06)^{-20}}{0.06}\right )+\frac{1000}{(1+0.06)^{20}}

Bond Price=50*\left (11.47\right )+\frac{1000}{3.21}

\mathbf{Bond Price= 573.50+ 354.18 = 927.80}



You might be interested in
For the current year ($ in millions), Central Park Corp. had $80 in pretax accounting income. This included bad debt expense of
KatRina [158]

Answer:

$69

Explanation:

Calculation for Central Park's taxable income

Pretax accounting income $80

Less Temporary differenceDepreciation (15)

($35 – $20)

Bad debt expense $4

($6 – $2)

Taxable income$69

($80-$15+$4)

Therefore Central Park's taxable income will be $69

8 0
3 years ago
For the past year, Momsen, Ltd., had sales of $46,382, interest expense of $3,854, cost of goods sold of $16,659, selling and ad
Ivenika [448]

Answer:

Net income= $11,412.2

Explanation:

Giving the following information:

sales of $46,382

interest expense of $3,854

cost of goods sold of $16,659

selling and administrative expense of $11,766

depreciation of $6,415

t=0.35

We need to use the following formula:

Net income= (sales - COGS - selling and administrative expense - interest expense - depreciation) - tax + depreciation

First, we deduct Depreciation to decrease the tax base, but because it is not an actual payment, we have to sum it after tax.

Sales= 46,382

COGS= (16,659)

Gross profit= 29,723

Selling and administrative expense= (11,766)

Interest=(3,854)

Depreciation= (6,415)

EBT= 7,688

Tax= (7,688*0.35)= (2,690.8)

Depreciation= 6,415

Net income= $11,412.2

6 0
3 years ago
Prompt
Law Incorporation [45]

Answer:

Could you please be specific with your question?

Explanation:

8 0
3 years ago
An investor places $5,000 in an account. The stated annual interest rate is 6% compounded monthly. The value of the account at t
Nostrana [21]

Answer:

$5,983.40

Explanation:

Data provided in the question:

Principle amount = $5,000

Interest rate, r = 6% = 0.06

Time, t = 3 years

Compounded monthly i.e number of periods n = 12

Now,

Final amount = Principle × \left( 1 + \frac{r}{n} \right)^{\Large{n\times t}}

or

Final amount = $5,000 × \left( 1 + \frac{0.06}{12} \right)^{\Large{12\times3}}

or

Final amount = $5,000 × 1.005³⁶

or

Final amount = $5,000 × 1.196

or

Final amount = $5,983.40

7 0
3 years ago
Western Company recently lost its entire inventory in an earthquake. The following information is available from its accounting
harina [27]

Answer: dont care

Explanation:

8 0
2 years ago
Other questions:
  • 4. Miguel works as an insurance salesman, and is paid based on the number of sales he makes. He receives 10 percent of every sal
    7·1 answer
  • Moses is working on a kibbutz in Israel where all the members have the same standard of living and they equally divide the profi
    10·1 answer
  • A broker lists a property for $87,500 at 7% commission on the first $50,000 and 5% on the balance. The property sells for 4% les
    9·1 answer
  • Ben seems to have the Midas touch. He can recognize opportunity where others see only problems. His focus is on creating solutio
    10·1 answer
  • Windsor, Inc. reports the following for the month of June.
    5·2 answers
  • A software developer enters into a contract with a new customer to sell a software license and perform installation services. Th
    10·1 answer
  • You find a certain stock that had returns of 16 percent, −9 percent, 23 percent, and 24 percent for four of the last five years.
    8·1 answer
  • Which of the following is NOT one of the main motivations and characteristics of an entrepreneur?
    12·1 answer
  • 2. Why might it be a plus for a company to have such a high share price that trading in its stock is discouraged? What drawbacks
    14·1 answer
  • then impact of risky behaviour on one's well-being by referring to social,emotional,physical and spiritual ​
    7·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!