stu owns bonds of Markley Inc. which he says provides him with a constant 9.6% rate...

stu owns bonds of Markley Inc. which he says provides him with a constant 9.6% rate of return. Stu has been approached by an investment manager to invest in a 8% bond selling at 82. Should Stu buy the bonds, if the tenure of the bonds is 11 years? if yes, at what price?

Expert Solution

Price of Bond is nothing but PV of Cash flows from it.

Particulars	Amount
Coupon Amount	$ 8.00
Maturity Value	$ 100.00
Disc Rate	9.600%
Starting	1
Ending on	11

Year	Cash Flow	PVF/ PVAF @9.6 %	Disc CF
'1 - 11	$ 8.00	6.6164	$ 52.93
'11	$ 100.00	0.3648	$ 36.48
Bond Price			$ 89.41

PVAF = Sum [ PVF(r%, n) ]
PVF = 1 / ( 1 + r)^n
Where r is int rate per Anum
Where n is No. of Years

PVAF using Excel:
+PV(Rate,NPER,-1)
Rate = Disc rate
Nper = No. of Periods
Fair Price of Bond is $ 89.41. If the bond is available at $ 82, Bond is under priced and adviced to buy it.

Max Price we can pay for bond is $ 89.41

jeff jeffy answered 1 year ago

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