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1) McConnell Corporation has bonds on the market with 10
1)
McConnell Corporation has bonds on the market with 10.5 years to maturity, a YTM of 7.1 percent, a par value of $1,000, and a current price of $1,051. The bonds make semiannual payments.
What must the coupon rate be on these bonds?
2)
Gerry also wants to invest some money this year such that his investment returns $15,000 270 days from now. What amount of money should Gerry invest today at 4.1% interest p.a. to ensure he has $15,000 270 days from now?
Expert Solution
1)
Computation of Semiannual Coupon Payment using PMT Function in Excel:
=pmt(rate,nper,-pv,fv)
Here,
PMT = Coupon Payment = ?
Rate = 7.1%/2 = 3.55%
Nper = 10.5 years *2 = 21 Periods
PV = $1,051
FV = $1,000
Substituting the values in formula:
=pmt(3.55%,21,-1051,1000)
PMT or Semiannual Coupon Payment = $38.99
So, annual Coupon Payment $38.99*2 = $77.97
Annual Coupon Rate = $77.97/$1,000 = 7.80%
2)
Computation of Present Value using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Present Value = ?
Rate = 4.1%/360 = 0.01139%
Nper = 270 days
PMT = 0
FV = $15,000
Substituting the values in formula:
=-pv(0.01139%,270,0,15000)
PV or Present Value = $14,545.75
Note: 365 days in a year assumed.
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