Question

Mark wants to invest his money to earn at least 16%. A friend who is interested in investments has suggested him to buy a bond issued by XYZ Company that will mature in eight years. It has a face value of $1,000, pays a semi-annual coupon of $90, and currently sells for $1,200. Should he buy this bond? Why or why not?

*work please

Answer 1

Let us calculate the value of bond to you, given your 16% required rate

M = $1000, n = 8 * 2 = 16 semi-annual periods, i = 16%/2 = 8% (semi-annual), C = $90

P = $796.62 + $291.89

P = $1,088.51

This is less than what your friend is offering you ($1200). So, you should not buy this bond (for $1200).