Reference no: EM132836767
Question - Mark Goldsmith's broker has shown him two bonds. Each has a maturity of 5 years, a par value of $1,000, and a yield to maturity of 7.5%. Bond A has a coupon interest rate of 6.324% paid annually. Bond B has a coupon interest rate of 8.8% paid annually.
a. Calculate the selling price for each of the bonds.
b. Mark has $20,000 to invest. If he wants to invest only in bonds issued by Bond A, how many of those bonds could he buy? What if he wants to invest only in bonds issued by Bond B?
c. What is the total interest income that Mark could earn each year if he invested only in Bond A? Bond B?
d. Assume that Mark will reinvest the interest payments as they are paid (at the end of each year) and that his rate of return on the reinvestment is only 10%. For each bond, calculate the total dollars that Mark will accumulate over 5 years. Your total dollar circulation will include the interest Mark gets, the principal he receives when bond matures, and all the additional interest he earns from reinvesting the coupon payments that he receives.
e. The bonds issued by both Bond A and B might appear to be equally good investments because they offer the same yield to maturity of 7.5%. Notice, however, that your answers to part d are not the same for each bond, suggesting that one bond is a better investment than the other. Why is that the case?
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