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Questions Regarding Bonds and Investments

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49. Your cousin Lila has a $4000 municipal bond with 3 years remaining before it matures. It has a stated interest rate of 8%. She needs cash to pay off some medical expenses so she offers to sell you the bond for $3600. If your best other investment option is a 7% account, should you buy the bond?

50. If you buy the bond described in Problem 49 for $3,600, what will be the rate of return on the bond?

51. The Xenon Corporation needs to raise $1,000,000 in capital. They are considering two different financial options. Option A is to borrow the money from a commercial bank. Their best offer for a loan is from Florida National Bank. FNB will charge Xenon 9% for the loan and payments will be made monthly for 4 years. Option B is to issue 1500 bonds with a face value of $1,000 and a maturity date of 4 years. Xenon will pay 8% compounded annually on these bonds and will charge $750 for each bond. Xenon will also have to pay a fee of $100,000 to initiate the sale of the bonds. Which Option is best for Xenon? (Hint: Determine the present value to Xenon of each option.) Assume a MARR of 10%.

52. Tampa Manufacturing Co. is considering purchasing the following equipment:
Initial cost: $75,000
Annual labor cost: $11,500 first year increasing $500 per year
Annual maintenance cost: $1,200 first year increasing 4% per year
If the machine is expected to last 10 years, the company can invest elsewhere to earn 15%, and the salvage value at 10 years is $7000, what is the present worth of this equipment?

Please see attached file for full problem description.

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This solution provides a description of various questions regarding bonds and investments.

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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