Question

Today you buy a Wal-Mart bond with $10,000 par value and $678 semi-annual coupon payments. The bond matures in 7 years. You plan to hold the bond to its maturity. Wal-Mart will send you a check for the coupon payment every six months, with the first check arriving six months from today. At the maturity of the bond, Wal-Mart will send you a separate check for $10,000. You assume that Wal-Mart will not go bankrupt before the bond matures.

Over the life of the bond, the bond price will fluctuate, perhaps between $9,000 and $11,000. Thus, each coupon payment will be too small to reinvest in this Wal-Mart bond. Instead, you plan to deposit your coupons in a savings account that you expect will pay an APR of 2.79% per year, with semi-annual compounding.

What is the future value of your investment?

Round your answer to the nearest dollar.

Answer 1

FV of Investments = FV of Coupon Paymenst + Maturity Value.

FV of Annuity :
Annuity is series of cash flows that are deposited at regular intervals for specific period of time.

FV of Annuity = CF [ (1+r)^n - 1 ] / r
r - Int rate per period
n - No. of periods

Particulars	Amount
Cash Flow	$         678.00
Int Rate	1.395%
Periods	14

FV of Annuity = Cash Flow * [ [ ( 1 + r ) ^ n ] - 1 ] /r
= $ 678 * [ [ ( 1 + 0.01395 ) ^ 14 ] - 1 ] / 0.01395
= $ 678 * [ [ ( 1.01395 ) ^ 14 ] - 1 ] / 0.01395
= $ 678 * [ [1.214] - 1 ] / 0.01395
= $ 678 * [0.214] /0.01395
= $ 10402.61
FV of Investments = FV of Coupon Paymenst + Maturity Value.

= $ 10402.61 + $ 10000

= $ 20402.61