Question

•You would like to invest in bonds. Your broker suggests two different bonds. The first bond, issued by Trust Media, will mature in 2019. Its price is quoted at $962.10 and it pays a 5.7% coupon. The second bond suggested, issued by Abalon, Inc., also matures in 2019. This bond’s price is $1,019.40 and pays a 5.375% coupon. To help you decide between the bonds, you want to know:

1.How much money it will cost to buy 10 bonds,

2.What interest payments you will receive, and

3.What return the bonds offer if purchased today, 2014.

Answer 1

1: Cost of 10 bonds = Price *10

Trust Media cost = 962.10*10 = $9621

Abalon Inc cost = 1019.4* 10= $10194

2: Each Interest payments from Trust Media = 5.7%*1000 = $57 (for 5 years)

Each interest paymnet from Abalon Inc = 5.375%*1000 = $53.75 (for 5 years)

3: Using financial calculator
Input: Fv = 1000, PV = -962.10,N=5,PMT = 57

Solve for I/Y as 6.61

Return on TrustMedia = 6.61%

Using financial calculator
Input: Fv = 1000, PV = -1019.4 ,N=5, PMT = 53.75

Solve for I/Y as 4.93

Return on Abalon Inc. = 4.93%