Explore BrainMass
Share

Bond purchase decision

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

You are considering investing in a security that matures in 10 years with a par value of $1,000. During the first five years, the security has an 8 percent coupon with quarterly payments (i.e., you receive $20 a quarter for the first 20 quarters). During the remaining five years the security has a 10 percent coupon with quarterly payments (i.e., you receive $25 a quarter for the second 20 quarters). After 10 years (40 quarters) you receive the par value.

Another 10-year bond has an 8 percent semiannual coupon (i.e., the coupon payment is $40 every six months). This bond is selling at its par value, $1,000. This bond has the same risk as the security you are thinking of purchasing. Given this information, what should be the price of the security you are considering purchasing?

© BrainMass Inc. brainmass.com October 24, 2018, 8:10 pm ad1c9bdddf
https://brainmass.com/business/bond-valuation/bond-purchase-decision-89399

Solution Preview

Since the securities are of equal risk, they must have the same effective rate. Since the comparable 10-year bond is selling at par, its nominal yield is 8 percent, the same as its coupon ...

Solution Summary

Determine NPVs of securities.

$2.19
See Also This Related BrainMass Solution

Decisions About Bond Purchase

Bakersfield Co. 8.5s16 bonds pay interest semiannually, and are quoted in the WSJ ad 88 1/2. If your rate of return is 10%, would you buy these bonds in 2001 and what is the total amt.

Please show the calculations to get the answer.

Question about bonds purchase or not?
Bakersfield Co. 8.5s16 bonds pay interest semiannually, and are quoted in the WSJ ad 88 1/2. If your rate of return is 10%, would you buy these bonds in 2001 and what is the total amt

Stocks and bonds questions?
Butler corp 6s06 bonds pay interest smiannually and will mature Oct 8, 2006. If your required rate of return is 9%. per annum, how much should you pay for a $1,000 bond on April 9, 2001

Coupon bonds and interest question?
X Company 7% coupon bonds pay interest semiannually. When u bought one it had 11 yrs to maturity and the appropriate discount rate was 9%. After 1 yr th discount rate on such bonds in 8% because of the improved financial health of the Company. If u sell the bond today, what would your capital gain be?

Bond paying interest semiannually?
A bod pays interest semiannually and will mature after 6 yr. The required rate of return by the bondholders is 14% per annum, and the face amt of the bond is $1000. If th market price of the bond is $920.60, find its coupon rate.

Stocks that pay dividends?
X Corp stock pays $6 annual dividend and sells at $62 per share. The company expects to show continued growth at the rate of 4% per annum. Find the required rate of return by the stockholders

View Full Posting Details