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Shriver Corp. purchased ten $1,000 3​% bonds of Solar Corporation when the market rate of interest...

Shriver Corp. purchased ten $1,000 3​% bonds of Solar Corporation when the market rate of interest was 10​%. Interest is paid​ semiannually, and the bonds will mature in ten years.

How much did shriver pay on the bond investment?

Solutions

Expert Solution

In order to find out the purchase price, we first need to calculate the Present Value of interest and redemption value an investor is expected to receive

Interest is 1,000 X 3% X 6/12 = $15 per semiannual period

Semi Annual Period Amount PV Factor Present Value
1 15 0.95238                14.29
2 15 0.90703                13.61
3 15 0.86384                12.96
4 15 0.8227                12.34
5 15 0.78353                11.75
6 15 0.74622                11.19
7 15 0.71068                10.66
8 15 0.67684                10.15
9 15 0.64461                  9.67
10 15 0.61391                  9.21
11 15 0.58468                  8.77
12 15 0.55684                  8.35
13 15 0.53032                  7.95
14 15 0.50507                  7.58
15 15 0.48102                  7.22
16 15 0.45811                  6.87
17 15 0.4363                  6.54
18 15 0.41552                  6.23
19 15 0.39573                  5.94
20 15 0.37689                  5.65
20 1000 0.37689              376.89
             563.82

For one bond payment is 563.82, for 10 bonds payment will be 563.82 X 10 = 5638.2.
The reason why it is so low is because the interest offered by the company is significantly lower than the interest available in the market.

ekkarill92 answered 1 year ago
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