304-ch5_SU17-II.ppt

# R the nominal annual bond interest rate example given

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r – The nominal annual bond interest rate Example: Given the nominal annual bond interest rate, the payment frequency of the interest (monthly, quarterly, etc.) is also stated V = \$5,000 (face value) r = 4.5% per year paid semiannually N = 10 years

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Blank & Tarquin: 5-th Edition Ch. 5 Authored By: Dr. Don Smith Texas A&M University 8 Bond Example - continued The interest the firm would pay to the current bond holder is calculated as: 0.045 \$5,000( ) \$5,000(0.0225) 2 \$112.50 every 6 months I I The bond holder, buys the bond and will receive \$112.50 every 6 months for the life of the bond
Blank & Tarquin: 5-th Edition Ch. 5 Authored By: Dr. Don Smith Texas A&M University 9 Example- continued How much will you consider this bond if you can earn 8%/yr c.q.? What is fixed? The future interest payments are fixed The future face value of the bond in fixed What can vary? The purchase price such that you earn at least the 8%/yr c.q. P =\$112.50(P/A,4.04%,20)+\$5,000(P/F,2%,40)=\$3788 IF the buyer can buy this bond for \$3,788 or less, he/she will earn at least the 8% c.q. rate.

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