Question #57871

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?

Expert's answer

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.

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.

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