A bond with a face value of $8000 pays interest of 10% per year. This bond will be redeemed at par value at the end of its 15-year life, and the first interest payment is due one year from now. If the price of the bond is $7500, what is the annual yield the buyer can receive (please keep one digit after the decimal point, excluding the percentage sign as part of your answer, e.g. if your answer is 5.16%, please enter 5.2)?

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10-10-2019
Business

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A bond with a face value of $8000 pays interest of 10% per year. This bond will be redeemed at par value at the end of its 15-year life, and the first interest payment is due one year from now. If the price of the bond is $7500, what is the annual yield the buyer can receive (please keep one digit after the decimal point, excluding the percentage sign as part of your answer, e.g. if your answer is 5.16%, please enter 5.2)?

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Answer:

Ans. The annual yield the buyer can receive is 10.9

Explanation:

Hi, well, in order to find the annual yield of this bond we need to solve for "r" the following equation.

[tex]Price=\frac{Coupon((1+r)^{n}-1) }{r(1+r)^{n} } +\frac{FaceValue}{(1+r)^{n} }[/tex]

With Coupon = $8,000*0.1= $800; Face value=$8,000; n=15

As you can see, solving this equation would take forever, so we have to use the "IRR" function of MS Excel where you build a table in terms of years and cash flow. The cash flow of year zero must be the price ($7,500) and the final cashflow, in year 15, must be -$8,800 (face value plus coupon). Please find attached to this answer the spreadsheet that I made for you. (answer in yellow).

Best of luck.