Jane Smith, MD, has had a great year in her pediatrics practice and has cash that...

Jane Smith, MD, has had a great year in her pediatrics practice and has cash that she wants to invest. Her financial adviser suggests she buy a seven-year, $1,500 par value bond with an annual coupon rate of 10 percent and three years remaining to maturity. Dr. Smith decides to explore her options. She discovers that new, similarly risky bonds have an average annual rate of return of 12 percent. Bank certificates of deposit are returning 5 percent annually on average while a mutual fund investing in high-risk-growth stocks has an average annual rate of return of 20 percent. If Dr. Smith follows her financial adviser’s advice, what is the maximum amount she should pay for the bond? Explain your answer

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

COUPON RATE IS 10% AND CURRENT RATE ON SIMILAR BOND IS 12%, SO BOND WILL BE AVAILABLE AT LOWER THAN FACE VALUE.

AS WE HAVE CALCULATED, THE MAXIMUM SHE SHOULD PAY FOR BOND IS : 1427.95

jeff jeffy answered 1 year ago

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