stocks and bonds

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 %

10/17/2012 | Jackie from Saint Louis, MO | 1 Answer | 0 Votes

Answer 1

Generally, I leave calculations for the student. If you have questions, please email me, and I'll be happy to clarify.

(a) Total cost includes the cost of the investment and commissions,
so Total Cost = Market Cost + Commission Cost

Market Cost = (Bond Cost x No. of Bonds Purchased)

Commission Cost = (Commission x No. of Bonds Purchased)

(b) Annual Interest = (Bond Cost × Interest Rate) × (# of Bonds)
Remember that 11 3/4% = 0.1175

(c) Current yield = Annual Interest / Cost

For (c) its unclear to me, whether the cost should be market cost or total cost from part (a) above. I would expect your text to provide an answer whether commissions are included in the yield. If you use market cost, however, you would get 11.75%, which is the interest rate you were given (i.e. not an interesting answer). But if you include the commission in the cost, you'll get a more interesting answer, so I would recommend using Total cost, in the absence of instructions to the contrary in the text or from examples from your instructor.