Mark Goldsmith's broker has shown him two bonds issued by different companies. Each has a maturity of 4 years, a par value of $1,000, and a yield to maturity of 6.80%. The first bond is issued by Crabbe Waste Disposal and has a coupon interest rate of 6.317% paid annually. The second bond, issued by Malfoy Enterprises, has a coupon interest rate of 8.90% paid annually. a. Calculate the selling price for each of the bonds. b. Mark has $19,000 to invest. If he wants to invest only in bonds issued by Crabbe WasteDisposal, how many of those bonds could he buy? What if he wants to invest only in bonds issued by Malfoy Enterprises? c. What is the total interest income that Mark could earn each year if he invested only in Crabbe bonds? How much interest would he earn each year if he invested only in Malfoy bonds? d. Assume that Mark will reinvest all the interest he receives as it is paid and that his rate of return on the reinvested interest will be 11%. Calculate the total dollars that Mark will accumulate over 4 years if he invests in Crabbe bonds or Malfoy bonds. Your total calculation will include the interest Mark gets, the principal he receives when the bonds mature, and all the additional interest he earns from reinvesting the coupon payments he receives.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Mark Goldsmith's broker has shown him two bonds issued by different companies. Each has a maturity of 4 years, a par value of $1,000, and a yield to maturity of 6.80%. The first bond is issued by Crabbe Waste Disposal and has a coupon interest rate of 6.317% paid annually. The second bond, issued by Malfoy Enterprises, has a coupon interest rate of 8.90% paid annually.

a. Calculate the selling price for each of the bonds.

b. Mark has $19,000 to invest. If he wants to invest only in bonds issued by Crabbe WasteDisposal, how many of those bonds could he buy? What if he wants to invest only in bonds issued by Malfoy Enterprises?

c. What is the total interest income that Mark could earn each year if he invested only in Crabbe bonds? How much interest would he earn each year if he invested only in Malfoy bonds?

d. Assume that Mark will reinvest all the interest he receives as it is paid and that his rate of return on the reinvested interest will be 11%. Calculate the total dollars that Mark will accumulate over 4 years if he invests in Crabbe bonds or Malfoy bonds. Your total calculation will include the interest Mark gets, the principal he receives when the bonds mature, and all the additional interest he earns from reinvesting the coupon payments he receives.

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