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An investor thought that market interest rates were going to decline. He paid $19,000 for a corporate bond with a face value of $20,000. The bond has an interest rate of 10% per year payable annually.
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6 votes
An investor thought that market interest rates were going to decline. He paid $19,000 for a corporate bond with a face value of $20,000. The bond has an interest rate of 10% per year payable annually. If the investor plans to sell the bond immediately after receiving the 4th interest payment, how much will he have to receive in order to make a return of 14% per year? Solve using:

a. tabulated factors
b. the GOAL SEEK tool on a spreadsheet.

User Paul Lysak
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1 Answer

12 votes
12 votes

Answer:

Answer is explained in the explanation section below.

Step-by-step explanation:

a. In this part, we need to calculate the present worth using the formula to calculate the sale price of the bond.

As the coupon rate = 10% per year

So,

The Annual dividend will = 2000 = 10% x 20,000

19000 = 2000 (P/A, 14%,4) + B(P/F,14%,4)

19000 = 2000 (2.9137) + B (0.592)

Solving for B = Desired sales price of the bond

B =
(19000 - 5827.4)/(0.592)

B = 22251

b. Part b of this question is to solve using GOAL SEEK feature of a spreadsheet so, I have attached it in the attachment. Please refer to the attachment for the solution of part b.

An investor thought that market interest rates were going to decline. He paid $19,000 for-example-1
User Begoodpy
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