Question

Adam borrows an amount at an annual interest rate of 7%. He repays all interest and principal in a lump sum at the end of ten years from now. Adam uses the amount borrowed to purchase a 5-year bond with a par value of 1, 000 with coupons at a nominal rate of 10% payable semiannually, with the first coupon paid at the end of 6-month period from now. The bond is redeemed at par and Adam’s yield rate for the bond is 9% convertible semi- annually.

As Adam receives each coupon payment, he immediately puts the money into an account earning nominal rate of 5.8% convertible semiannually.

At the end of five years (from now), immediately after Adam receives the final coupon payment, Adam deposits the accumulated value of the coupons and the redemption amount of the bond into a savings account earning an annual interest rate of 6%. At the end of each year from year 6 through 10, Adam deposits an additional amount of 50 into this savings account.

Find Adam’s accumulated value at the end of ten years after the loan is re- paid.

Answer 1