Richard recently inherited $12,000 and is considering purchasing 12 bonds of the Lucky Corporation. The bond...

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?

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Expert Solution

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.

jeff jeffy answered 10 months ago

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