Question

Mark​ Goldsmith's broker has shown him two bonds issued by different companies. Each has a maturity of

5

​years, a par value of

​$1,000​,

and a yield to maturity of

8.70 %

  The first bond is issued by Crabbe Waste Disposal and has a coupon interest rate of

6.319​%

paid annually. The second ​ bond, issued by Malfoy​ Enterprises, has a coupon interest rate of

8.80​%

paid annually.

 Calculate the selling price for each of the bonds.906.66 and 1,003.92

 Mark has

​$21,000

to invest. If he wants to invest only in bonds issued by Crabbe Waste​ Disposal, how many of those bonds could he​ buy? What if he wants to invest only in bonds issued by Malfoy​ Enterprises 23 and 20

 What is the total interest income that Mark could earn each year if he invested only in Crabbe​ bonds? How much interest would he earn each year if he invested only in Malfoy​ bonds?

Answer 1

If he wants to invest only in bonds issued by Crabbe Waste Disposal:

Par Value = $1,000

Annual Coupon Rate = 6.319%
Annual Coupon = 6.319% * $1,000
Annual Coupon = $63.19

Number of Bonds Purchased = 23

Total Interest Income = Annual Coupon * Number of Bonds Purchased
Total Interest Income = $63.19 * 23
Total Interest Income = $1,453.37

If he wants to invest only in bonds issued by Malfoy Enterprises:

Par Value = $1,000

Annual Coupon Rate = 8.80%
Annual Coupon = 8.80% * $1,000
Annual Coupon = $88.00

Number of Bonds Purchased = 20

Total Interest Income = Annual Coupon * Number of Bonds Purchased
Total Interest Income = $88.00 * 20
Total Interest Income = $1,760.00