Question

# PLEASE DRAW A CASH FLOW DIAGRAM AND THEN ANSWER! If there is no diagram = Thumbs...

PLEASE DRAW A CASH FLOW DIAGRAM AND THEN ANSWER! If there is no diagram = Thumbs down!!!!!

A corporate bond has a value of \$10,000, a bond interest rate of 8% per year payable semiannually, and a maturity date of 20 years from now. If a person purchases the bond for \$9,000 when the interest rate in the market place is 8% per year compounded semiannually, the size and frequency of the interest payments the person will receive are?

There are 20 years to maturity; Bond is semiannual pay bond, hence we will have about 40 time intervals in which we would receive 40 bond coupon payment.

Time 0 = Cash flow = -\$9,000 (Initial cost)

Size of interest payment = \$400 ; Frequency = 2 payments per year x 20 years = 40

Time 1 to Time 40 = Size and frequency of Interest payment = 10000 x 8% /2 = \$400

Time 40 will also have additional payment of principal = \$10400

We will sum last two payments i.e. \$400 + \$10000 = \$10,400

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Cash flow diagram below:

Time 23 24 25 26 27 28 29 30 31 32 33 3435 36 37 38 39 40 10 11 12 13 14 1516 17 18 19