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Question

?????????????????? ?????(?)??????????????; ??????,??????. (2) Perpetuities and Effective Interest Rate. What is the value The of a perpetuity that pays $200 every 3 months forever? interest rate quoted on an APR basis is 8%, (5,) (3) Bond pricing. A General Power bond carries a coupon rate of 8%, has 9 years of maturity, and sells at a yield to maturity of 7%. (Assume annual interest payments.) a. What interest payment do bondho1ders receive each year? (2 b. At what price does the bond sell? (4' c. What will1 happen to the bond price if the yield to maturity falls to 6%? (4, ) ( P/A, 7%, 9)-5.033 (P/A, 6%, 9) -4. 486 ( P/F, 7%, 9)-0, 547 (P/F, 6%, 9 )-0.596

Explanation / Answer

2 Value of Perpetuity

Formula = Amount received per quarter / Interest Rate per quarter

Value = $200 / (8% * 3 /12)

Value of Perpetuity = $10000

3.

a. Interest amount Bondholders receive = Bond Value * Coupon Rate = $1000 * 8% = $80

b. Bond Price = Interest * (P/A, 7%, 9) + Redemption * (P/F, 7%, 9)

Bond Price = $80 * 5.033 + $1000 * 0.547

Bond Price = $402.64 + $547

Bond Price to sell = $949.64

c. Bond Price if YTM is 6%

Bond Price = Interest * (P/A, 6%, 9) + Redemption * (P/F, 6%, 9)

Bond Price = $80 * 4.486 + $1000 * 0.596

Bond Price = $358.88 + $596

Bond Price to sell = $954.88

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