Question

Complete b-e and show explanations

You are looking to purchase a $10,000 bond issued by Mexico in USD. It pays $500 annually and matures exactly 10 years from now.

A) What is Mexico’s current long term foreign currency credit rating by S&P? AA-

B) How much would you pay for this bond?

C) What rate did you use to make the calculation?

D) Why did you choose the rate?

Answer 1

Answer (A) - AA- (as given in the question itself)

Answer (B) - That depend on my Risk averseness and Return Expectation.

Year	CF	8%		10%		12%
		PVF	PV	PVF	PV	PVF	PV
0	(10,000.00)	1.00		1.00		1.00
1	500.00	0.93	462.96	0.91	454.55	0.89	446.43
2	500.00	0.86	428.67	0.83	413.22	0.80	398.60
3	500.00	0.79	396.92	0.75	375.66	0.71	355.89
4	500.00	0.74	367.51	0.68	341.51	0.64	317.76
5	500.00	0.68	340.29	0.62	310.46	0.57	283.71
6	500.00	0.63	315.08	0.56	282.24	0.51	253.32
7	500.00	0.58	291.75	0.51	256.58	0.45	226.17
8	500.00	0.54	270.13	0.47	233.25	0.40	201.94
9	500.00	0.50	250.12	0.42	212.05	0.36	180.31
10	10,500.00	0.46	4,863.53	0.39	4,048.20	0.32	3,380.72
Price			7,986.98		6,927.72		6,044.84

Answer C - The rate chosen are 8%, 10% and 12%

Answer D - Rate totally depend on the risk averseness and return expectation.