In: Finance
You have an opportunity to buy a $25,000 bond for $15,000. The
coupon amount is $1,000 each year. It is a 15 year bond.
Part A. Your MARR is 8%. Should you buy the bond? [Leave these
calculations on the sheet and then add columns for Part B.]
Part B. If the anticipated rate of inflation is 2.5% and you are
willing to accept a MARR of 6% that accounts for inflation, should
you buy the bond.
Please use Excel functions and show
(a) If the bond is purchased, coupon amount of $1000 is received each year for 15 years and $25000 is received at end of 15 years. Hence, cash inflows are $1000 for 14 years and $26000 in 15th year
Let us calculate the Present Value of these returns -
PV Factor = 1 / (1+r)n
PV = Cash Flow * PV Factor
Hence, PV of returns = $16440.52
Hence, we should purchase the bond for $15000
(b) Let us calculate the above using MARR of 6%
In this case also, we should purchase the bond