Question

An investor thought that market interest rates were going to decline. He paid $19,000 fora corporate bond with a face value of $20,000. The bond has an interest rate of 10% per year payable annually. If the investor plans to sell the bond immediately after receiving the 4th interest payment, how much will he have to receive (sell it for) in order to make a return of 14% per year?

Answer 1

$22,251

Step-by-step explanation:

Coupon rate = $2,000

Now, we calculate the seired sale price of the bonds:

19,000 = 2,000[P/A, 14%, 4] + S[P/F. 14%, 4]

19,000 = 2,000(2.9137) + S(0.592)

S = (19,000 - 5,827.4) / 0.592

S = 22251.01351351351

S = $22,251

So, he have to receive $22,251.