What is your valuation of a $7,000, 4% bond, with dividends paid semiannually and a 12 year maturity? Ideally, you would like to earn a 6% return on your investment over this time period

Finance Aug 05, 2020

What is your valuation of a $7,000, 4% bond, with dividends paid semiannually and a 12 year maturity? Ideally, you would like to earn a 6% return on your investment over this time period.

Expert Solution

= COUPON AMOUNT* PRESENT VALUE INTEREST FACTOR ANNUITY (r,n) + REDUMPTION PROCEEDS * PRESENT VALUE INTEREST FACTOR(r,n)

COUPON AMOUNT = 7000*4%*6/12 = $140

REDUMPTION PROCEEDS = 7000 ITSELF

r (REQUIRED RETURN) = 6%*6/12 = 3%

n (PERIOD) = 12*2 = 24

= COUPON AMOUNT* PRESENT VALUE INTEREST FACTOR ANNUITY (r,n) + REDUMPTION PROCEEDS * PRESENT VALUE INTEREST FACTOR(r,n)

= 140*PRESENT VALUE INTEREST FACTOR ANNUITY (3% ,24) + 7000*PRESENT VALUE INTEREST FACTOR(3% ,24)

= 140 * 16.9355 + 7000 * 0.4919

= 2370.97+3443.30

INTRINSIC VALUE OF A PLAIN VANILLA BOND = 5814.27

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