Question

Problem 3: Premier Textbooks, Ltd. Premier Textbooks has been a leader in elementary textbooks for over 25 years. Recently, you received a bonus of $10,000 from your company, which had their best year in 5 years. You would like to invest in bonds with a good, solid company and are considering Premier Textbooks. Recently, Premier has offered a new 15 year bond issue of $500,000, with a par value of $1000 per bond. They pay 5.5 per cent interest and the current market price for these bonds is $1085. Your required rate of return is 7%. Required: Compute the bond’s expected rate of return. Calculate the value of the bond to you, given your required rate of return. Should you purchase the bond? Explain. Name at least 2 other facts about this or any other bond you might consider buying that would help you decide on whether you should buy the bond.

Answer 1

PV = -1085

FV = 1000

N = 15

PMT = 55

use rate funciton in Excel

expected rate of return for the bond = 4.70%

b. if the required rate of return is 7%, replace rate with 7% and calculate PV

price given the required rate of return = 863.38

c. You should not buy the bond since it offers a lower rate of return

you can buy the bond if:

a. the general interest rates on the bond market tend to fall making the bond more valuable

b. the creditworthiness of the issuer improves making the bond worth more