Question

Bill Mitselfik has purchased a bond that was issued by Acme Chemical. This bond has a face value of $1,000 and pays a dividend of 8% per year, compounded semi-annually. Bill bought the bond three years ago at face value and there are seven years remaining until the bond matures. Bill wishes to sell it now for a price that will result in Bill earning an annual yield of 10% compounded semi-annually. What price does Bill need to sell the bond for to earn his desired return

Answer 1

Answer:

$1,068.02

Explanation:

For computing the selling price of the bond we need to use the Future value formula or function i.e to be shown in the attachment below:

Given that,  

Present value = $1,000

Rate of interest = 10% ÷ 2 = 5%

NPER = 3 years × 2 = 6 years

PMT = $1,000 × 8% ÷ 2 = $40

The formula is shown below:

= FV(Rate;NPER;PMT;-PV;type)

The present value comes in negative

So, after applying the above formula, the selling price of the bond is $1,068.02

Answer 2

Bill needs to sell the bond for $1068.02 to earn his desired return and this will result in earning an annual yield of 10%.

What is Future value of a bond?

Future value (FV) is the value of an asset (e.g., a bond) for a future date based on a specified growth rate or return rate.

Future value helps investors estimate the value of their investment in the future. Future value is based on the assumption of time value for money.

As per the information,

$\rm\, Present \;value = \ 1,000\\\\Rate = 10\% , Compounded \;semi-annually \;= 5\%\\\\Number \;of\; Periods = 3 \;years \times 2 = 6\\\\\rm\,Coupon \;payment = \dfrac{8\%}{2} \times 1,000 = \ 40\\\\\\Future \;value = (FV(Rate; NPER; PMT; -PV; type)\\\\Future \;value = \ 1068.02$

Hence, Bill needs to sell the bond for $1068.02 to earn his desired return.

To learn more about Future value of a bond, refer to the link:

https://brainly.com/question/26265746