BSW Corporation has a bond issue outstanding with an annual coupon rate of 7 percent paid quarterly and four years remaining unt
il maturity. The par value of the bond is $1,000. Determine the fair present value of the bond if market conditions justify a 14 percent, compounded quarterly, required rate of return. (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))
1 answer:
Answer:
$788.35
Explanation:
In this question, we use the present value formula which is shown in the spreadsheet.
The NPER represents the time period.
Given that,
Future value = $1,000
Rate of interest = 14% ÷ 4 quarters = 3.5%
NPER = 4 × 4 quarter = 16 years
PMT = $1,000 × 7% ÷ 4 quarters = $17.50
The formula is shown below:
= PV(Rate;NPER;PMT;FV;type)
So, after solving this, the answer would be $788.35
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Answer:
Winners
- The US Federal Government
- Joy
Losers
- Karen
- Herb
- 3rd National Bank
Explanation:
The US Federal Government is a Winner because Inflation in general has the effect of eroding the value of money. Generally interest rates account for this but when it is Unexpected Inflation they don't. The US government is a winner because the amount of debt they now have in real terms have decreased.
Joy is also a winner for the same reason as the US government.
Karen lost out as a result of this because her Fixed Pension does not change with inflation which means that when inflation rates go up unexpectedly she will be able to buy less goods and services.
Herb's money will lose real value as a result of inflation because like Karen, Herb will be able to buy less goods and services when inflation rises.
3rd National Bank will also lose out because they made loans that would not have accounted for Unexpected inflation. The real value that they will be owed will therefore be less and they will suffer 'real' losses.
