Question
Now suppose the 20,000 dollar bond pays coupons at 10 percent (annually) and the investor wishes to earn 7 percent interest. a. Suppose the investor
Now suppose the 20,000 dollar bond pays coupons at 10 percent (annually) and the investor wishes to earn 7 percent interest. a. Suppose the investor can invest the coupon income at 7 percent interest. What is the price of the bond? Write out an amortization schedule that gives the book value at the end of each year. b. Now suppose the investor amortizes the bond premium by a sinking fund that pays 5 percent interest (instead of getting 7). What is the new price of the bond? Write out an amortization schedule that gives the book value at the end of each year.
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