Question

What would you pay for a $225,000 debenture bond that matures in 15 years and pays $11,250 a year in interest if you wanted to earn a yield of

a. 3%

B. 4%

C. 5%

Answer 1

	Annual interest rate =$11250/225000=5%
a)	Yield 3%
	Computation Of Bond Price
	a	Annual Interest Amount	$       11,250.00
		($225000*5%)
	b	PV Annuity Factor for (15 Years,3%)	11.93794
	c	Present Value Of Annual Interest (a*b)	$   1,34,301.77
	d	Redemption Value	$   2,25,000.00
	e	PV Factor Of (15 Years,3%)	0.64186
	g	Present Value Of Redemption Amount (d*e)	$   1,44,418.94
	f	Intrinsic Value ( Price ) Of The Bond (c+g)	$   2,78,720.71
2)	Yield 4%
	Computation Of Bond Price
	a	Annual Interest Amount	$       11,250.00
		($225000*5%)
	b	PV Annuity Factor for (15 Years,4%)	11.11839
	c	Present Value Of Annual Interest (a*b)	$   1,25,081.86
	d	Redemption Value	$   2,25,000.00
	e	PV Factor Of (15 Years,4%)	0.55526
	g	Present Value Of Redemption Amount (d*e)	$   1,24,934.51
	f	Intrinsic Value ( Price ) Of The Bond (c+g)	$   2,50,016.37
3)	Yield 5%
	Since the annual interest rate and the yield rate is the same. The Face value would be bond price.
		Price= $225000