Acme is selling 8.00%, $1000. bonds for payment in 15.0 years(face amount of $10

Question

Acme is selling 8.00%, $1000. bonds for payment in 15.0 years(face amount of $1000, coupon rate of 8.00% with a 15-year maturity). That is, the bond will pay 8.00% of the principle at the end of each year and then 108% at the end of the 15th year. What is the equivalent cost of a 10.00% bond under the same conditions, i.e., how much would you have to pay for a 10.00% bond that provides the same income as the 8.00% bond? That is, determine the present value of the payments from an 8.00% bond, but at a 10.00% interest rate. Assume the interest is determined only at the end of each year. ($847.88) WITHOUT USING EXCEL

Explanation / Answer

coupon amount per period = 80

number of periods = 15

equivalent cost

= 80 * [1-(1+0.1)^-15]/0.1 + 1000/1.1^15

= 847.88

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