Question

1. company x is issuing bonds. they plan to issue 10,000 $1000 par, 7% bonds that pay semi-annual for 5 years. If the price per bond is $1020, what is the market annual rate-of- return?(percentage, 2 decimals,)

2.assume you will make $40,000/year with a high school dipolma. you will make$70,000/year with accounting degree. Assume you work for 40 years and earn 8%. How much is that accounting degree worth?(hint: compare PVs)

Answer 1

Since the Bond Price is higher then the Face Value of Bond hence the Bond is issued at premium and that is why the market interest rate is lower than the stated interest rate
Now we will use the Trial and error method:
Table values are based on:
Face Amount	$1,000
Interest Payment	$1,000*3.5% =$35
Market Interest rate per period	3.25%
Cash Flow	Table Value(PV of 18% for 6 period)	Amount	Present Value
PV of Interest	8.4224	35	$295
PV of Principal	0.72627	1000	$726
Price of Bond	$1,021
So the effective interest rate is 3.25% for 6 month period or 6.5% for annual rate of return
So the answer is 6.5%
Present value of earnings with High school diploma =$40,000*PVAF(8%,40) =$40,000*11.92461 =$476,984
Present value of earnings with Accounting Degree =$40,000*PVAF(8%,40) =$70,000*11.92461 =$834,723
So the Worth of Accounting Degree =$834,723 - $476,984 =$357,739