Question

Today you buy a Wal-Mart bond with $10,000 par value and $500 semi-annual coupon payments. The bond matures in 11 years. You plan to hold the bond to its maturity. Wal-Mart will send you a check for the coupon payment every six months, with the first check arriving six months from today. At the maturity of the bond, Wal-Mart will send you a separate check for $10,000. You assume that Wal-Mart will not go bankrupt before the bond matures.

Over the life of the bond, the bond price will fluctuate, perhaps between $9,000 and $11,000. Thus, each coupon payment will be too small to reinvest in this Wal-Mart bond. Instead, you plan to deposit your coupons in a savings account that you expect will pay an APR of 2.48% per year, with semi-annual compounding.

What is the future value of your investment?

Round your answer to the nearest dollar.

Answer 1

Use FV function in EXCEL to find the future value of coupon investments.

=FV(rate,nper,pmt,pv,type)

Please remember that it is semi-annual compounding

rate=2.48%/2=1.24%

nper=2*11=22

pmt=500

pv=0

type=0

=FV(1.24%,22,-500,0,0)=$12,557.89

The total future value of the investmnet=$12,557.89+$10,000=$22,557.89