Chapter #15-Bonds Eric purchased the following bond at par value (face value): F
ID: 2394627 • Letter: C
Question
Chapter #15-Bonds Eric purchased the following bond at par value (face value): Face Value $1,000 Coupon Rate 5% Maturity 20 years Interest paid semi-annual . Question #1 What is Eric entitled to receive each year? Question #2 Assume that 5 years later, interest rates in the market increase If Eric sells it, will he get more or less than face value? ess Assume that Jessica buys the bond from Eric for $940. How much is she entitled to receive each year? What is her annual yield? . Question #3 Assume that 5 years later, interest rates in the market decrease If Eric sells it, will he get more or less than face value? Assume that Jessica buys the bond from Eric for $1,060. How much is she entitled to receive each year? What is her annual yield?Explanation / Answer
1. ERIC entitled to receive each year is the semi annual interest paid i.e.:
Semi Annual Interest : $. 1000 X 5/100 X 6/12 = $.25
Total Interest receive in a year = $25 X 2 = $50
2. If ERIC sell it , he will get less than face value. Because the fixed interest and principal payments stated in the bond will become less attractive to investors as compared to new bond issued in the current market.
If Jessica buy the bond at 940 than her Annual Yield :( Annual Dollar Interest Paid ÷ Market Price ) X 100
($50 ÷ $940) X 100 = 5.32%
She is entitled to receive the same amount of interest as like original bond holder i.e $50 per year
3. If ERIC sell it , he will get more than face value. Because tthe bond's stated fixed interest rate or payments will be greater than the new bonds issued at the current market interest rates.
If Jessica buy the bond at 1,060 than her Annual Yield :( Annual Dollar Interest Paid ÷ Market Price ) X 100
($50 ÷ $1,060) X 100 =4.72%
She is entitled to receive the same amount of interest as like original bond holder i.e $50 per year
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