A corporation is planning to sell $5M worth (face value) of 10years bonds to fin

Question

A corporation is planning to sell $5M worth (face value) of 10years bonds to finance a major expansion. They intend to sell 2,500bonds with a face value of $2,000. They will give 10% interest (ofthe face value of the bonds) payable annually at the end of each ofthe10 years. At the end of 10 years, in addition to the interest,they will pay each of the bond holders the face value of the bond.What can they expect to receive for the bonds (i.e. the sellingprice) if investors expect to earn 12% on their investment beforetaxes?  

Explanation / Answer

coupon payment = 2000*0.1=200
so , Price = coupon *a(10) + face value / (1.12)^10 where a(10)=( 1-(1.12)^-10)/0.12=5.650223 Price = 200 * 5.650223 + 2000/1.12^10 Price=1773.99
so , Price = coupon *a(10) + face value / (1.12)^10 where a(10)=( 1-(1.12)^-10)/0.12=5.650223 Price = 200 * 5.650223 + 2000/1.12^10 Price=1773.99

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.