In: Finance
Richard recently inherited $12,000 and is considering purchasing 12 bonds of the Lucky Corporation. The bond has a par value of $2,000 with 12 percent coupon rate and will mature in 12 years. Does richard have enough money to buy 12 bonds if the required rate of return is 10 percent?
USE EXCEL FORMULAS SO I CAN SEE THE INPUTS PLEASE AND SHOW THE WORK I WANT TO LEARN IT!
Par/Face value | 2000 | |||||||||||
Annual Coupon rate | 0.12 | |||||||||||
Annual coupon | 240 | |||||||||||
Present Value = Future value/ ((1+r)^t) | ||||||||||||
where r is the interest rate that is 10% and t is the time period in years | ||||||||||||
price of the bond = sum of present values of future cash flows | ||||||||||||
r | 0.1 | |||||||||||
mt | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 |
future cash flow | 240 | 240 | 240 | 240 | 240 | 240 | 240 | 240 | 240 | 240 | 240 | 2240 |
present value | 218.1818 | 198.3471 | 180.3156 | 163.9232 | 149.0211 | 135.4737 | 123.1579 | 111.9618 | 101.7834 | 92.53039 | 84.11854 | 713.733 |
sum of present values | 2272.55 | |||||||||||
The price of each bond $2272.55. | ||||||||||||
The price of 12 bonds is | 12*2275.55 | |||||||||||
The price of 12 bonds is | 27306.6 | |||||||||||
Richard has inherited $12000, however the price of 12 bonds is $27306.6. | ||||||||||||
Richard does not have enough money to buy 12 bonds. |