A musician is looking to sell off future royalties income in return for an upfront payment. His banker plans to raise $55 million by releasing $10,000 ten-year bonds. Each bond pays dividends semi-annually at a rate of 7.9% per year.

a) What amount will a bond purchaser receive each 6 months?

b) What amount will the purchaser receive at the end of ten years?

Answer and Explanation:

Given:

Bond price = $10,000

Dividend rate = 7.9% per year

A. Computation of Dividend receive each 6 months :

Dividend rate for 6 month = 7.9% / 2 = 3.95% = 0.0395

Dividend receive each 6 months = Bond price × Dividend rate for 6 month

Dividend receive each 6 months = $10,000 × 0.0395

Dividend receive each 6 months = $395

B. Computation of amount receive at the end of ten years:

Amount receive at the end of ten years is equal to face value of bond

Amount receive at the end of ten years = $10,000

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