An investor trading in bonds is looking for 18 % return on his purchases. He buy

Question

An investor trading in bonds is looking for 18 % return on his purchases. He buys bonds with a few years left before maturity, holds them, and redeems them for face value when they mature. Looking through the bond listings, he finds a bond listed with a $8,000 face value, that pays 9 % interest on its face value each year, and is priced at $5,482 . How many years (at most) must be left before maturity on this bond in order to meet the investors desired percent return? (Enter your answer as a number rounded to one decimal place, without the percent sign.)

Explanation / Answer

Present market value of bond = Present value on all future cash flow

Present value of all future cash flow = $5482

PMT or annual initerest = .09*8000 =$720

YTM = 18% (Given)

let no of years left = n years

5482 = 720*PVIFA(18%,n)+(8000/1.18^n)

on solving for n using calculator

n = 6 years, left

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