Answered: $1,000 Face value 20 bond interest…

$1,000 Face value 20 bond interest payments $48.13 5 10 15 20 Semiannual periods $996.25 Figure 7.3 A typical cash flow transaction associated with an investment in the corporate bond

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter7: Receivables And Investments

Section: Chapter Questions

Problem 7.11E

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

Consider buying a $1,000-denomination corporate bond at the market price of $996.25. The interest will be paid semiannually at an interest rate per payment period of 4.8125%. Twenty interest payments over 10 years are required. We show the resulting cash flow to the investor as shown. Find the return on this bond investment (or yield to maturity).

$1,000
Face value
20 bond interest payments
$48.13
5
10
15
20
Semiannual periods
$996.25
Figure 7.3 A typical cash flow transaction associated with
an investment in the corporate bond

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