Question

You wish to sell a bond that has a face value

of $5,000. The bond bears an interest rate of 7.5%,

which is payable quarterly. Six years ago, the bond

was purchased at $4,800. At least a 9% annual return

on the investment is desired. What must be the minimum

selling price of the bond now in order to make

the desired return on the investment?

Answer 1

Dear students ,

Please refer the below answer

Step 1

Interest per quarter of the bond is 7.5/ 4 = 1.825%

Interest per quarter of the bond= 5000* 1.825% = 93.75

Step 2

As the interest is paid quarterly so the discounting will also be done quarterly so discount rate that is the desired rate = 9%/4 = 2.25%

Step 3
In order to get 9% return on a bond which is yeildeing return of 7.5% we need to sell the bond at higher price

Now to determine the sp we are using techniques of bond valuation

Let us assume sp to be x

93.75 (PVAF 2.25%,24) + X (PVIF 2.25%,24) = 4800

1724 + 0.5862 x = 4800

Therefore x = 5247 thats is bond should be sold at 5247