Question

The Florida Investment Fund buys 70 bonds of the Gator Corporation through a broker. The bonds pay 8 percent annual interest. The yield to maturity (market rate of interest) is 10 percent. The bonds have a 20-year maturity. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Answer 1

The question requirement is found below:

a.Compute the price of a bond. (Do not round intermediate calculations and round your answer to 2 decimal places.)

b.Compute the total value of the 70 bonds. (Do not round intermediate calculations and round your answer to 2 decimal places.)

a. price of a bond is $829.73

b value of 70 bonds is $58,081.10

Step-by-step explanation:

The price of the bond can be computed using the pv formula in excel as found below:

=-pv(rate,nper,pmt,fv)

rate is the yield to maturity on the bond which is 10% annually

nper is the number of annual coupon that the bond would pay before redemption,hence a 20 year bond would pay coupon interest 20 times before it is redeemed

pmt is the annual coupon,which is 8%*$1000=$80

fv is the face value of $1,000

=-pv(10%,20,80,1000)=$ 829.73

each bond is worth $829.73

70 bonds=70*$829.73 = $58,081.10