A) If the current market interest rate is 6.5%, you should not buy the bond because the present value of the bond is $905.97, which is less than the current price of $940.
B) Assuming you buy and hold this bond for 5 years, the price you must sell the bond to earn a 7% rate of return on this investment is $938.50.
The price of a bond can be determined by calculating the present value of the cash flows till maturity through discounting.
The present value can be computed using the present value formula or table. It can also be determined using an online finance calculator as follows:
a. If the current market interest rate is 6.5%. Should you buy the bond? Why or why not?
N (# of periods) = 15 years
I/Y (Interest per year) = 6.5%
Coupon interest rate = 5.5%
PMT (Periodic Payment) = $55
FV (Future Value) = $1,000
Results:
PV = $905.97
Sum of all periodic payments = $825 ($55 x 15)
Total Interest = $919.03
b. Assuming you buy and hold this bond for 5 years. What price must you sell the bond for if you want to earn a 7% rate of return on this investment?
N (# of periods) = 5 years
I/Y (Desired Interest per year) = 7%
Coupon interest rate = 5.5%
PMT (Periodic Payment) = $55
FV (Future Value) = $1,000
Results:
PV = $938.50
Sum of all periodic payments = $275 ($55 x 5)
Total Interest = $336.50
Learn more about calculating the present values at https://brainly.com/question/20813161
