6 35 points A S10000 10year municipal bond is offered at a p

6) (35 points) A S10,000, 10-year municipal bond is offered at a premium for S11,000. The bond rate is 8% per year compounded quarterly. If John wishes to earn 7% per year compounded quarterly on the bond investment, should he purchase the bond assuming he keeps the bond till it matures? Explain. Show all work

Solution

value of bond if your Required retun is 7%

PV factor annuity 7% quaterly =+(1-(1+0.07/4)^(-10*4))/(0.07/4) =28.5942

PV factore at he of year 15

Purchase price of the bond $ 110000 which is more than Expected price of $10714.86 hence the bond is overvalued hence he should not purchase the bond

		PV factor 7%	Amount
Interets Payment	200	28.5942*	5718.85
Maturity value	10000	0.4996*	4996.01
Value of Bond	10714.86