A young engineering company is a subcontractor in an effort to develop technology that will reliably...

A young engineering company is a subcontractor in an effort to develop technology that will reliably detect and respond to release of a nuclear weapon. The company is in need of additional funding and issues a series of $1,000 face value bonds that pay a nominal annual rate of 6% with quarterly payments. The bond matures in 5 years.

You buy the bond for $1,000, and decide to sell it immediately after the 12th interest payment. If you want to earn 12% per year compounded quarterly on your investment, what must be your selling price?

Expert Solution

Use PV function in EXCEL to find the selling price

=PV(rate,nper,pmt,fv,type)

The payments are happening on quarterly basis. The total quarterly payments in 5 years=5*4=20 years

We have to calculate the price, after 12th payemnt which means after 3 years. The remaining payemnt periods=8 (20-12)

rate=12%/4=3%

nper=8 periods

pmt=(coupon rate*face value)/4=(6%*1000)/4=60/4=15

fv=1000

=PV(3%,8,15,1000,0)=$894.70

The price of the bond after 12th payment would be=$894.70

jeff jeffy answered 2 years ago

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A young engineering company is a subcontractor in an effort to develop technology that will reliably...

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