stocks and bond

Question

Abby Sane decided to buy corporate bonds instead of stock. She desired to have the fixed-interest payments. She purchased 9 bonds of Meg Corporation 11 3/4  % at 90.00. As the stockbroker for Abby (assume you charge her a $9 commission per bond).

a) Calculate the total cost of the purchase. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Total cost $=

(b) Calculate the total annual interest to be received. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Total annual interest $=

(c) Calculate the current yield. (Round your answer to the nearest tenth percent. Omit the "%" sign in your response.)

Current yield %=

Answer 1

Hi Jackie,

Your question is a little difficult to understand, so I'll give you my best interpretation of it.  It looks like Abby is buying bonds with a face value of $1000 and a coupon rate of 11.75% at a cost of $900 each (at a premium).  She is going to buy NINE of these bonds, and she is charged $9 for each purchase.

a) The total cost of her purchase is:  Number of Bonds * (Cost of the Bond + Commission per bond)

  That is, the cost is:  9 * ( 900.00 + 9.00) = 9 (909.00) = $8181.

  So for the first part, a) Total cost $= 8181.

b) A coupon rate of 11.75% means the bond pays 11.75% of its face value per year, so we can figure out the annual interest earned. 

  Multiply the number of bonds (9) by the face value ($1000) times the coupon rate (11.75%):

9*$1000* (.1175) = $1057.50

(b) Total annual interest $= 1057.50

c) Current yield is the face value ($1000) times the coupon rate (11.75%) divided by the current price ($900).  Since the bond is selling for less than face value, the current yield is higher than the coupon rate:

Current yield = 1000*.1175/900 = 13.1%

(c) Current yield %= 13.1

 

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