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samualson samualson
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5 years ago
A bond with a $1,000 face value and a 10 percent annual coupon rate matures in 15 years.
a.Determine the value of the bond to a friend of yours with a required rate of return of 13%.
b.A zero coupon bond with similar risk is selling for $180. The bond has a face value of $1,000 and matures in 15 years. Your friend asks you which bond she should invest in, the zero coupon bond or the bond in part (a). Which bond do you recommend, and why? Assume the market price of the bond in part (a) is $820.
Textbook 
Foundations of Finance

Foundations of Finance


Edition: 9th
Authors:
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#1
5 years ago
 
a.Value of Bond = $100 (PVIFA13%,15) + $1,000 (PVIF13%,15) = $806.13; Alternatively, using Excel, PV(Rate = .13, Nper = 15, Pmt = 100, Fv = 1000) = 806.13
b.Recommend the zero coupon bond. The yield to maturity on the zero coupon bond is 13.48%, which is higher than your friend's required return. The yield to maturity on the bond in part (a) must be less than 13% since the market price of the bond is more than $806.13.
 
samualson Author
wrote...
#2
5 years ago
Oh god, I was lost before coming here. Thanksss
wrote...
#3
5 years ago
Great, make sure you mark the topic solved, it hides it from other eyes Slight Smile
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