Question

Saving for their children’s education

To establish funds for a RESP (to be opened upon the birth of either Jack or Jill, whomever comes first) John has suggested purchasing bonds as a lower risk alternative to more volatile funds. John has identified a 20-year bond with a face value of $10,000 which pays a coupon rate of 9% compounded semi-annually. The bond has 15 years remaining until maturity and a current yield rate of 8%. John can purchase the bond for $10,125. Is this good value?

Answer 1

Price of Bond is nothing but PV of Cash flows from it.

Bond Price Today:

Period	Cash Flow	PVF @4 %	Disc CF
1	$      450.00	0.9615	$      432.69
2	$      450.00	0.9246	$      416.05
3	$      450.00	0.8890	$      400.05
4	$      450.00	0.8548	$      384.66
5	$      450.00	0.8219	$      369.87
6	$      450.00	0.7903	$      355.64
7	$      450.00	0.7599	$      341.96
8	$      450.00	0.7307	$      328.81
9	$      450.00	0.7026	$      316.16
10	$      450.00	0.6756	$      304.00
11	$      450.00	0.6496	$      292.31
12	$      450.00	0.6246	$      281.07
13	$      450.00	0.6006	$      270.26
14	$      450.00	0.5775	$      259.86
15	$      450.00	0.5553	$      249.87
16	$      450.00	0.5339	$      240.26
17	$      450.00	0.5134	$      231.02
18	$      450.00	0.4936	$      222.13
19	$      450.00	0.4746	$      213.59
20	$      450.00	0.4564	$      205.37
21	$      450.00	0.4388	$      197.48
22	$      450.00	0.4220	$      189.88
23	$      450.00	0.4057	$      182.58
24	$      450.00	0.3901	$      175.55
25	$      450.00	0.3751	$      168.80
26	$      450.00	0.3607	$      162.31
27	$      450.00	0.3468	$      156.07
28	$      450.00	0.3335	$      150.06
29	$      450.00	0.3207	$      144.29
30	$      450.00	0.3083	$      138.74
30	$ 10,000.00	0.3083	$   3,083.19
Price of Bond	$ 10,864.60

PVF(r%, n) = 1 / ( 1 + r)^n
r = Int rate per period
n = No. of periods

Pls do rate, if the answer is correct and comment, if any further assistance is required.