Question

You see a person drop an envelope at a busy airport. There is a better than 85% chance that you can catch the person who dropped it, if you wanted to, but it would take a running effort by you. Because it is a busy airport, there is also the possibility that someone else also saw the envelope drop, and could see you pick it up, but they would not know what it contained. It turns out that the envelope contains ten (10) Registered Bonds and ten (10) Bearer Bonds, all with a coupon rate of 8.84%. The bonds pay interest semi-annually and have five (5) years left to maturity. The yield-to-maturity is 7.50%.

What is the Present Value of one of the Bonds?

What is the Present Value of all of the Bonds?

Given the circumstances in this Bond question, what would you do, and why?

Answer 1

You need to use Financial calculator to solve this problem. You can download it.

N => 5 * 2 = 10 (The Bond is for 10 Years and pays semiannually, so 10 payments)

PMT = {8.84% * 1000 = 88.4} / 2 = 44.2 ( The coupon is 8.84% on Face Value, considering the face value to be $1000)

FV = 1,000 (Considering Face value of bond is $1,000)

I/Y = 7.5 (The Yield to maturity of bond is 8.84%)

CPT + PV = 788.586

So the present value of the bond is $788.586

There are in total 20 bonds, 10 - Bearer and 10 - Registered.

So present value of all bonds is 788.586 * 20 = 15,771.72

I will get the bond holder's name from the registered bonds. So i will find out his details and return all the 20 bonds to him.