Answer to Question #57871 in Finance for Noja

Question

Raul has recently inherited RM10,000 and is considering purchasing 10 bonds of the
Twilight Corporation. The bond has a par value of RM1,000 with 10 percent coupon rate
and will mature in 10 years. Does Raul have enough money to buy 10 bonds if the required
rate of return is 9 percent?

Answer 1

The cash flow for each of the years is as follows:

Year One = RM100 (which is a par value x coupon rate)
Year Two = RM100
Year Three = RM100
Year Four = RM100
Year Five = RM100
Year Six = RM100
Year Seven = RM100
Year Eight = RM100
Year Nine = RM100
Year Ten = RM1100 (par value + coupon)

Thus, the PV of the cash flows is as follows (expected cash flows in period T / (1 + rate of return) to the T power):

Year One = RM91.74
Year Two = RM84.17
Year Three = RM77.22
Year Four = RM70.87
Year Five = RM64.98
Year Six = RM59.63
Year Seven = RM54.7
Year Eight = RM50.19
Year Nine = RM46.04
Year Ten = RM464.72

Now to find the value of the bond:
Value = RM91,74 + RM84,17 + ...
Value = RM1,064.26

Therefore, Raul doesn't have enough money to buy 10 bonds (he can only afford 9)

Answer: No, Raul doesn't have enough money to buy 10 bonds if the required rate of return is 9 percent.