Corporate Finance Doubts 1

anshul.skit
Posts: 1
Joined: Tue Jul 24, 2012 11:25 am

Re: Corporate Finance Doubts 1

Since, par value is 1000, we will calculate interest on this as:
=1000[1+(10/200)]^(20*2)
=7039.989

Thus, if I buy this bond for \$1000, I will receive \$7039.989 after 20 yrs.
That also means, if I buyed this bond for suppose \$1100, I would still have the value of this bond after 20 yrs as \$7039.989.

Now, Opportunity cost if I sell this bond today and get \$849.54 and reinvest it on ongoing market interest rate (say 10%), I'll get:
=849.54(1+.1)^20 .... (Considering annual rate to be 10% remaining same for rest of 20 yrs)
=\$5715.28

Hence, the loss would be: 7039.989-5715.28= \$1324.78
This is what I understand, hope every concept related to it is covered.
Let me know if anybody has some different view on this.

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