In: Finance
Please show all your work if you use the Calculator. If done in Excel, please send me the spreadsheet / workbook.
Coupon 8%
Maturity date 2038
Interest paid semiannually
Par Value $1000
Market interest rate 10%
Coupon 9%
Maturity date 2028
Interest paid semiannually
Par Value $1000
Market interest rate 8%
Coupon 9%
Maturity date 2027
Interest paid semiannually
Par Value $1000
Market price $955.00
Page Two
State of nature Probability Return
Boom 25% 20%
Average 60% 8%
Recession 15% 0%
Investment # of shares Price per share Expected return
A. 2000 $20 10%
B. 3000 $10 15%
C. 1000 $15 8%
What is the principle and interest on the first payment?
What is the principle and interest on the twelfth payment?
How much interest will you pay over the 20 years?
Page Three
Compute the semi-annual interest, using the equation as shown below:
Semi-annual = Face value*Rate of interest/ 2
= $1,000*8%/ 2
= $40
Hence, the semi-annual interest rate is $40.
Compute the semi-annual market rate, using the equation as shown below:
Semi-annual market rate = Annual rate/ 2
= 10%/ 2
= 5%
Hence, the semi-annual rate is 5%.
The maturity date is 2038 and the issue date is 2020, thus the time period in maturity is 18 years.
Compute the present value annuity factor (PVIFA), using the equation as shown below:
PVIFA = {1 – (1 + Rate)-Number of periods}/ Rate
= {1 – (1 + 0.05)-36}/ 5%
= 16.5468517047
Hence, the present value annuity factor is 16.5468517047.
Compute the price of the bond, using the equation as shown below:
Bond price = (Semi-annual interest*PVIFA) + {Maturity value/ (1 + Rate)Time}
= ($40*16.5468517047) + {$1,000/ (1 + 0.05)36}
= $661.874068188 + ($1,000/ 5.79181613558)
= $661.874068188 + $172.657414633
= $834.531482821
Hence, the price of the bond is $834.531482821.