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30 March, 11:55

What would you pay for a $215,000 debenture bond that matures in 15 years and pays $10,750 a year in interest if you wanted to earn a yield of: 4%, 5%, 6%

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  1. 30 March, 12:45
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    at 4% $238,904.53

    at 5% $215,000

    at 6% $194,118.66

    Step-by-step explanation:

    Yield is the return received on the investment, The rate of yield is determined by calculating the percentage of return to total investment.

    Price of the bond is the present value of all cash flows of the bond. These cash flows include the coupon payment and the maturity payment of the bond.

    According to given data

    Face value of the bond is $215,000

    Coupon payment = C = $10750 annually

    Number of periods = n = 15 years

    Price of the bond is calculated by following formula:

    Price of the Bond = C x [ (1 - (1 + r) ^-n) / r ] + [ F / (1 + r) ^n ]

    Yield = 4% annually

    Price of the Bond = 10,750 x [ (1 - (1 + 4%) ^-15) / 4% ] + [ $215,000 / (1 + 4%) ^15 ] = $238,904.53

    Yield = 5% annually

    Price of the Bond = 10,750 x [ (1 - (1 + 5%) ^-15) / 5% ] + [ $215,000 / (1 + 5%) ^15 ] = $215,000

    Yield = 6% annually

    Price of the Bond = 10,750 x [ (1 - (1 + 6%) ^-15) / 6% ] + [ $215,000 / (1 + 6%) ^15 ] = $194,118.66
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