Question

A $10,000 bond with 18%/year, compounded semi-annually (interest is paid every six month) is available in the market. The bond matures in 10 years. The closest PW of this bond if the purchaser can earn 12%/year, compounded quarterly is:_____.

Answer 1

Answer:

present value = 13313.50

Explanation:

given data

bond = $10,000

interest = 18% per year = 9% per semi annual period

bond matures = 10 years = 20 semi annual period

purchaser can earn =  12% per year compounded quarterly = 3% per quater

so efftive semi annual rate is

efftive semi annual rate = (1+3%)² - 1  

efftive semi annual rate = 6.09%

and

we get here coupon paymnet that is

coupon payment = 9% × $10,000  

coupon payment = $900

so present value is

present value = 900 (P/A,6.09%,20) + 10000 (P/F,6.09%,20)

present value = 900 × 11.3865  +  10000 × 0.3065

present value = 13313.50