No Excel ! ONLY use hand calculations to find the solution to this engineering e

Question

No Excel ! ONLY use hand calculations to find the solution to this engineering economic question (Present worth analysis, Annual worth analysis, Bonds, IRR, MARR)

4. An investor purchased a bond that has a coupon rate of 8% paid quarterly, face value $1000, and maturing in 30 years. The purchasing price was $850 and had 20 years to maturity 1) If your MARR was 10%, was the purchase a good decision or bad decision? 10 points) 2) The bond was kept for only 7 years and sold for $950 immediately after the 28th interest payment was received. Calculate the nominal and effective rates of return per year on this investment. (15 points)

Explanation / Answer

1.

Coupons=1000*8%/4=20

-850+20/1.025+20/1.025^2+20/1.025^3...........................1000/1.025^80

=-850+20/1.025*(1-(1/1.025)^80)/(1-1/1.025)+1000/1.025^80

=-22.259

Now, as NPV of this is negative, the purchase was a wrong decision

2.

0=-850+20/(1+r/4)+20/(1+r/4)^2.............950/(1+r/4)^28

0=-850+950/(1+r/4)^28+20/(1+r/4)*(1-(1/(1+r/4))^28)/(1-1/(1+r/4))

r=10.57%

So, nominal return=10.57%

effective return=(1+10.57%/4)^4-1=10.9964%

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