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Draw a time line illustrating the expected future cash flows

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Reference no: EM132666307

You are considering purchasing a bond with the following characteristics: par value = $1,000

coupon rate = 4% per year

payment schedule = semiannual

maturity date = 10 years

required rate of return = 6% per year

Problem A. Draw a time line illustrating the expected future cash flows for this bond.

Problem B. What is the highest price you would be willing to pay for this bond and still receive your required 6% annual return? In other words, what is the value of the bond?

Problem C. Assume that the bond's current market price is $795. Would you be willing to buy the bond at this market price? Why or why not?

Problem D. Assume that the current market price for this bond is $795. If you purchase the bond at this price, what will your return (yield-to-maturity) be? What effect would a higher market price have on the bond's yield-to-maturity? Why?

Reference no: EM132666307

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