A company has issued 10-year bonds, with a face value of $1,000,000, in $1,000 units. Interest at 8% is paid quarterly. If an investor desires to earn 12% nominal interest (compounded quarterly) on $10,000 worth of these bonds, what would the purchase price have to be?

Question

Sydnee

Business

20 May, 11:22

A company has issued 10-year bonds, with a face value of $1,000,000, in $1,000 units. Interest at 8% is paid quarterly. If an investor desires to earn 12% nominal interest (compounded quarterly) on $10,000 worth of these bonds, what would the purchase price have to be?

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Answers (1)

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Demarcus Shields · Answer 1

Answer: $7689

Explanation:

Given the following;

Interest rate (i) = 8%; compounded quarterly = 8%:4 = 0.02

Nominal rate (r) = 12%; compounded quarterly = 12%:4 = 0.03

Period (N) = 10years = 10 * 4 = 40

Bond value (C) = $10,000

Using financial calculator;

Bond purchase price;

$10,000 (P/F, 0.03,40) + $10,000 * (0.02) [P/A, 0.03,40]

$10,000 (0.3066) + $10,000 * (0.02) (23.115)

=$3066 + 4623 = $7689