An Annual-Coupon Corporate Bond Has a 20-Year Maturity,an 11

Question

Examlex · Accepted Answer

The Answer is a.
Price of the bond is the present value of the cash flows from a bond.
It can be calculated using

\frac { 115 } { ( 1.11 ) ^ { 1 } } + \frac { 115 } { ( 1.11 ) ^ { 2 } } + \frac { 115 } { ( 1.11 ) ^ { 3 } } \cdots \frac { 115 } { ( 1.11 ) ^ { 19 } } + \frac { 1115 } { ( 1.11 ) ^ { 20 } }

= $1039.82
b.
If the coupon is reinvested at 9%,at the end of 20 years it grows to

115 ( 1.09 ) ^ { 19 } + 115 ( 1.09 ) ^ { 18 } + 115 ( 1.09 ) ^ { 17 } + \ldots + 115 ( 1.09 ) ^ { 2 } + 115 ( 1.09 ) ^ { 1 }

= $5,768.414
At the end of 20 years,the investor will have $1115 + $5,768.414 = $6,883.41

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