McDonald's Corporation has 8 7/8% bonds that mature in 15 years. What is the value of a $1000 par value McDonald's Corporation bond for each of the following required rates of return assuming the investor will hold the bond to maturity assume the coupon is paid annually

a. The value of a $1000 par value McDonald's Corporation bond for 10% required rates of return is approximately $914.43.

b. The value of a $1000 par value McDonald's Corporation bond for 8.875% required rates of return is approximately $1,000.00.

c. The value of a $1000 par value McDonald's Corporation bond for 6% required rates of return is approximately $1,279.22.

Explanation:

Note: This question is note complete. The complete question is therefore provided before answering the question as follows:

McDonald's Corporation has 8% (8.875%) bonds that mature in 15 years. What is the value of a $1000 par value McDonald's Corporation bond for each of the following required rates of return assuming the investor will hold the bond to maturity assume the coupon is paid annually?

a. 10%

b. 8.875%

c. 6%

The explanation to the answer is now given as follows:

a. The value at 10% annual required rate

Annual coupon = Bond face value * Coupon rate = $1000 * 8.875% = $88.75

Annual coupon discount factor = ((1 - (1 / (1 + r))^n) / r) .......... (1)

Where;

r = Annual required interest rate = 10%, or 0.10

n = number of years = 15

Substituting the values into equation (1), we have:

Annual coupon discount factor = ((1-(1/(1 + 0.10))^15) / 0.10) = 7.60607950630837

Present value of coupon = (Annual coupon * Annual coupon discount factor) = $88.75 * 7.60607950630837 = $675.039556184868

Present value of the face value of the bond = Face value / (1 + r)^n = $1,000 / (1 + 0.10)^15 = $239.392049369163

Therefore, we have:

Current bond value = Present value coupon + Present value of the face value of the bond = $675.039556184868 + $239.392049369163 = $914.431605554031

Approximating to 2 decimal places, we have:

Current bond value = $914.43

Therefore, the value of a $1000 par value McDonald's Corporation bond for 10% required rates of return is approximately $914.43.

b. The value at 8.875% annual required rate

Annual coupon = Bond face value * Coupon rate = $1000 * 8.875% = $88.75

Annual coupon discount factor = ((1 - (1 / (1 + r))^n) / r) .......... (1)

Where;

r = Annual required interest rate = 8.875%, or 0.08875

n = number of years = 15

Substituting the values into equation (1), we have:

Annual coupon discount factor = ((1-(1/(1 + 0.08875))^15) / 0.08875) = 8.12051595946604

Present value of coupon = (Annual coupon * Annual coupon discount factor) = $88.75 * 8.12051595946604 = $720.695791402611

Present value of the face value of the bond = Face value / (1 + r)^n = $1,000 / (1 + 0.08875)^15 = $279.304208597388

Therefore, we have:

Current bond value = Present value coupon + Present value of the face value of the bond = $720.695791402611 + $279.304208597388 = $999.999999999999

Approximating to 2 decimal places, we have:

Current bond value = $1,000.00

Therefore, the value of a $1000 par value McDonald's Corporation bond for 8.875% required rates of return is approximately $1,000.00.

c. The value at 6% annual required rate

Annual coupon = Bond face value * Coupon rate = $1000 * 8.875% = $88.75

Annual coupon discount factor = ((1 - (1 / (1 + r))^n) / r) .......... (1)

Where;

r = Annual required interest rate = 6%, or 0.06

n = number of years = 15

Substituting the values into equation (1), we have:

Annual coupon discount factor = ((1-(1/(1 + 0.06))^15) / 0.06) = 9.712248987741

Present value of coupon = (Annual coupon * Annual coupon discount factor) = $88.75 * 9.712248987741 = $861.962097662014

Present value of the face value of the bond = Face value / (1 + r)^n = $1,000 / (1 + 0.06)^15 = $417.26506073554

Therefore, we have:

Current bond value = Present value coupon + Present value of the face value of the bond = $861.962097662014 + $417.26506073554 = $1,279.22715839755

Approximating to 2 decimal places, we have:

Current bond value = $1,279.23

Therefore, the value of a $1000 par value McDonald's Corporation bond for 6% required rates of return is approximately $1,279.22.

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.

answer; 20% is your answer;