A $10 000 bond was cleared in four years by setting up a sinking fund that was
Question:
A $10 000 bond was cleared in four years by setting up a sinking fund that was earning 5.5 percent compounded semi-annually. If deposits were made to the fund at the end of every six months, calculate the size of the periodic payments deposited and the total interest earned in the fund.
Step by Step Answer:
The size of the periodic payment is 113458 Calculat...View the full answer
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Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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