Bond valuation and yield to maturity Mark Goldsmi th's broker has shown him two

bonds issued by diffe rent compani es. Each has a maturi ty of 5 years, a par va lue of

$1,000, and a yield to matu rity of 7.5%. The firs t bond is issued by Cra bbe Waste

Disposal Corporation and has a coupon rate of 6.324% paid annuall y. The second

bond, issued by Malfoy Enterp rises, has a coupon rate of 8.8% paid annuall y.

a. Calculate the selling price for each bond .

b. Mark has $20,000 to invest. If he wa nts to invest only in bonds issued by Crabbe

Waste Disposa l, how many of those bonds could he buy? What if he wants to

invest onl y in bonds issued by Malfoy Enterprises? Round your answers to the

nearest integer.

c. What is the tota l interest income th at Mark could ea rn 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 rei nvest all the interest he receives as it is paid , and his

ra te of return on re in vested in terest wi ll be 10%. Calculate the tota l dollars that

Mark will accumula te over 5 years if he in vests in Crabbe bonds or Malfoy

bonds. Your total dollar calcu lation will incl ude the interest Mark gets, the principa

l he receives when the bonds mature, and all the additional interest he earns

from reinvesting the coupon payments th at he receives.

e. The bonds issued by Crabbe and Ma lfoy might appear to be equally good investments

beca use they offer the same yield to maturity of 7.5% . Notice, however,

that your answers to part d are not the same for each bond, suggesting that one

bond is a better investment than the oth er. Why is that the case?