You have an opportunity to buy a $25,000 bond for $15,000. The coupon amount is $1,000...

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

Solutions

Expert Solution

(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

jeff jeffy answered 1 year ago

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