Bonds Example - earn 12% interest. NPV = 400(P/A, 6%,...

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Screen clipping taken: 10/1/2010 11:03 PM A = 10000*(i/2) = 10000*(8%/2)=400 First, calculate how much each coupon pays: Next, Draw out the cash flow diagram for the payments from the bond: The following example is from last year's Homework: There was some discussion over whether you calculate the NPV using 6% and 40 periods, or 12% and 20 periods (in which case you would use $800 per period instead of $400). Given the prompt, I can see how this conclusion can be reached, but for this case, let's assume you want to nominally
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Unformatted text preview: earn 12% interest. NPV = 400(P/A, 6%, 40)+10000(P/F, 6%, 40) NPV = 400*(15.046)+10000*(.0972)=6990.4 To calculate how much you should pay for the bond if you want to earn 12% annually, calculate the NPV of this cash flow at 12%. Since you must pay 6700+500=$7200 for this bond, you should not make this investment. Bonds Example Friday, October 01, 2010 11:02 PM Unfiled Notes Page 1...
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This note was uploaded on 01/06/2012 for the course CIVIL AND 167 taught by Professor Ibbs during the Fall '11 term at University of California, Berkeley.

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