Question

n january 1,2020 flounder corportaion purchased 325 of the $1000 face value, 11%, 10-year bonds of Walters Inc. The bonds mature on January 1,2030 and pay interest annually beginning January 1, 2021. Flounder purchased bonds to yield 11%. How much did Flounder pay for the bonds?

Answer 1

Explanation:

To calculate how much Flounder paid for the bonds, we need to use the present value formula for a bond:

PV = C/(1+r)^1 + C/(1+r)^2 + ... + C/(1+r)^n + F/(1+r)^n

where PV is the present value, C is the annual coupon payment, r is the yield, n is the number of years, and F is the face value.

In this case, Flounder purchased 325 bonds with a face value of $1000 each, so the total face value of the bonds is:

325 * $1000 = $325,000

The coupon rate is 11%, which means that the annual coupon payment is:

0.11 * $1000 = $110

The bonds mature in 10 years, so n = 10. The yield is also 11%, so r = 0.11.

Using these values, we can calculate the present value of the bond:

PV = $110/(1+0.11)^1 + $110/(1+0.11)^2 + ... + $110/(1+0.11)^10 + $1000/(1+0.11)^10

PV = $110/(1.11)^1 + $110/(1.11)^2 + ... + $110/(1.11)^10 + $1000/(1.11)^10

PV = $110/1.11 + $110/(1.11)^2 + ... + $110/(1.11)^10 + $1000/(1.11)^10

PV = $110*(1-(1.11)^-10)/0.11 + $1000/(1.11)^10

PV = $750.98 + $314.23

PV = $1,065.21

Therefore, Flounder paid $1,065.21 for the 325 bonds of Walters Inc.