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Richard recently inherited $12,000 and is considering purchasing 12 bonds of the Lucky Corporation. The bond...

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Finance

Richard recently inherited $12,000 and is considering purchasing12 bonds of the Lucky Corporation. The bond has a par value of$2,000 with 12 percent coupon rate and will mature in 12 years.Does richard have enough money to buy 12 bonds if the required rateof return is 10 percent?

USE EXCEL FORMULAS SO I CAN SEE THE INPUTS PLEASE AND SHOW THEWORK I WANT TO LEARN IT!

Answer & Explanation Solved by verified expert
4.1 Ratings (756 Votes)

Par/Face value 2000
Annual Coupon rate 0.12
Annual coupon 240
Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is 10% and t is the time period in years
price of the bond = sum of present values of future cash flows
r 0.1
mt 1 2 3 4 5 6 7 8 9 10 11 12
future cash flow 240 240 240 240 240 240 240 240 240 240 240 2240
present value 218.1818 198.3471 180.3156 163.9232 149.0211 135.4737 123.1579 111.9618 101.7834 92.53039 84.11854 713.733
sum of present values 2272.55
The price of each bond $2272.55.
The price of 12 bonds is 12*2275.55
The price of 12 bonds is 27306.6
Richard has inherited $12000, however the price of 12 bonds is $27306.6.
Richard does not have enough money to buy 12 bonds.

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Transcribed Image Text

Richard recently inherited $12,000 and is considering purchasing12 bonds of the Lucky Corporation. The bond has a par value of$2,000 with 12 percent coupon rate and will mature in 12 years.Does richard have enough money to buy 12 bonds if the required rateof return is 10 percent?USE EXCEL FORMULAS SO I CAN SEE THE INPUTS PLEASE AND SHOW THEWORK I WANT TO LEARN IT!

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