Homer Simpson bought a bond with 20 years to maturity from Doh! a year ago for...

Homer Simpson bought a bond with 20 years to maturity from Doh! a year ago for $1100. This bond has a $1000 par value with a 7.5% coupon rate and makes annual coupon payments. Today, Homer needs money to buy pork rinds and wants to sell the bond, and teh bond's yield to maturity is 6%. What return would Homer earn from sellling the bond today? Solve with using terms in TVM solver (N, I, PV, PMT, FV)

a) 6.1%

b)12.9%

c) 6%

I know the answer is 12.9 but I don't know how to get there, please exaplin using the TVM values.

Solutions

Expert Solution

He can sell the bond today at the current market price of the bond. The price of a bond can be determined by computing present value of future cash flows. The bond has 19years remaining to maturity.

Price of bond = Coupon interest * PVIFA(6%,19) + Redemption Value*PVIF(6%,19)

=( $1,000*7.5%*11.1581) + ($ 1,000*0.3305)

= $ 836.86 + $ 330.50

= $ 1,167.36

Return on the bond = (Current price-Cost of bond)/Cost of bond

= (1167.36-1100)/1100

= 67.36/1100 = 6.10%

The correct answer is option A

ekkarill92 answered 1 year ago

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