Grandpa Russ thinks he needs a fixed income for the next 10 years. He currently has $10,000 in CDs, which are maturing at the end of this month. The CDs can be renewed for one year at 4 1/2 percent. Russ calls his broker, Ben Seller, and learns that his $10,000 can be put to better use by purchas-ing debentures issued by Grab-n-Run, Inc. These bonds are 10-year bonds with a coupon rate of 8 percent, which is paid semiannually. The current market interest rate is 6 percent for bonds of a similar nature. The broker tells Grandpa Russ that he may buy each bond for $1,400. Grandpa knows that he must pay a premium, but he believes that a $400 premium is too high. What is the maximum price you should tell Grandpa to pay for each bond? Compare the risk of the CD with the risk of the bond. What else would you advise Grandpa with regard to this type of investment?
Grandpa Russ thinks he needs a fixed income for the next 10 years. He currently has $10,000 in CDs, which are maturing at the end of this month. The CDs can be renewed for one year at 4 1/2 percent. Russ calls his broker, Ben Seller, and learns that his $10,000 can be put to better use by purchas-ing debentures issued by Grab-n-Run, Inc. These bonds are 10-year bonds with a coupon rate of 8 percent, which is paid semiannually. The current market interest rate is 6 percent for bonds of a similar nature. The broker tells Grandpa Russ that he may buy each bond for $1,400. Grandpa knows that he must pay a premium, but he believes that a $400 premium is too high. What is the maximum price you should tell Grandpa to pay for each bond? Compare the risk of the CD with the risk of the bond. What else would you advise Grandpa with regard to this type of investment?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Grandpa Russ thinks he needs a fixed income for the next 10 years. He currently has $10,000 in CDs, which are maturing at the end of this month. The CDs can be renewed for one year at 4 1/2 percent. Russ calls his broker, Ben Seller, and learns that his $10,000 can be put to better use by purchas-ing debentures issued by Grab-n-Run, Inc. These bonds are 10-year bonds with a coupon rate of 8 percent, which is paid semiannually. The current market interest rate is 6 percent for bonds of a similar nature. The broker tells Grandpa Russ that he may buy each bond for $1,400. Grandpa knows that he must pay a premium, but he believes that a $400 premium is too high.
- What is the maximum price you should tell Grandpa to pay for each bond?
- Compare the risk of the CD with the risk of the bond.
- What else would you advise Grandpa with regard to this type of investment?
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