Question

Suppose Mike corporation buys $1,000,000 of TD bonds at a price of 101. The TD bonds pay cash interest at the annual rate of 7% and mature at the end of five years.) i. How much did Mike corporation pay to purchase the bond investment? How much will Mike corporation collect when the bond investment matures? ii. How much cash interest will Mike Corporation receive each year from TD? iii. Will Mike Corporation annual interest revenue on the bond investment be more or less than the amount of cash interest received each year? Give your reason.

Answer 1

Mike corporation buys = $1,000,000.

TD bonds at a price of = 101

TD bonds pay cash interest at the annual rate of = 7%

i)Calculating Mike corporation pay to purchase the bond investment

= Mike corporation buys x TD bonds at a price/100

= $1,000,000 x 101/100

= $1,000,000x1.01

=$1,010,000

Purchase the bond investment $1,010,000

$1,000,000 Mike corporation collect when the bond investment mature after 5 year

ii) Calculating interest will Mike Corporation receive each year from TD

= annual rate x Mike corporation buys

= 7% x $1,000,00

= 0.07 x1,000,00

= $70,000

$70,000 interest will Mike Corporation receive each year from TD

iii) Mike Corporation annual interest revenue on the bond investment be more

Explanation

Bond which was brought higher price when it compare to par value resulting brough was premium, when we calculating effective interest rate should be less than the rate of Interest (ROI)

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