The worked solutions are included for this question but I need an explanation for the worked solution.

The worked solutions are included for this question but I need an explanation for the worked solution.

Why must the equation of step 2 include the 1/1.0246956^20?

Bond “ABC” is a 10-year, $1,000 par value bond which pays a 6% coupon with quarterly payments during its first five years (you receive $15 a quarter for the first 20 quarters). During the remaining five years the security has an 8% quarterly coupon (you receive $20 a quarter for the second 20 quarters). At the end of 10 years (40 quarters) you will also receive the par value. 

Bond “DEF” is another 10-year bond issued by the same company, and it has a 10% semiannual coupon. This bond is selling at its par value $1,000 and has the same risk as the bond “ABC”. Given this information, what should be the price of the bond “ABC”? 

Worked Solution:

Step 1: Find the periodic interest rate on “ABC”.  

Since the securities are of equal risk and maturity, they must have the same effective annual rate. Since “DEF” is a 10-year bond is selling at par, its nominal yield is 10%, the same as its coupon rate.      DEF’s effective annual rate is (1 + 0.10/2)2 – 1 = 10.25%.   Since “ABC” has quarterly payments, its periodic rate = (1.1025)0.25 – 1 = 2.4695%  

Step 2: Price of ABC Price of “ABC” = PV of Annuity (20 payments of $15) + PV of Annuity (next 19 payments of $20) + PV of (last $20 + $1,000) = 15/0.024695 (1 − 1/1.024695^20 ) + 1/1.024695^20 { 20/0.024695 (1 − 1/1.024695^19 )} + 1020/1.024695^40  

= 234.51 + 184.42 + 384.42 = $ 803.36  

The final answer is $803.36

Why must the equation of step 2 include the 1/1.0246956^20?

Show more

Calculate Your Essay Price
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more