Investment required for a bond/stock purchase: How much cash is required to purchase $125,000 nominal of 8% stock at a market price of 92 (i.e., $92 per $100 nominal)?
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A$ 115000
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B$ 120000
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C$ 105000
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D$ 125000
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E$ 118000
Answer
Correct Answer: $ 115000
Explanation
Introduction / Context: Quoted prices for fixed-interest stock are typically per $100 nominal. To find the cash outlay for a desired nominal amount, scale the quoted price accordingly. The coupon rate is irrelevant to the cash needed for the purchase.
Given Data / Assumptions:
- Nominal (par) to be purchased = $125,000.
- Quoted price = 92 per $100 nominal.
Concept / Approach: Investment = Nominal * (Quoted price / 100). Multiply the nominal target by 0.92 to get the total cash outlay, ignoring brokerage and taxes (not mentioned).
Step-by-Step Solution:
Investment = 125,000 * 92 / 100 = 125,000 * 0.92 = $115,000.Verification / Alternative check: Each $100 nominal costs $92; for 1,250 hundreds, pay 1,250 * $92 = $115,000.
Why Other Options Are Wrong: $120,000, $105,000, and $118,000 do not match 92% of $125,000; $125,000 is the cost at par, not at 92.
Common Pitfalls: Treating 92 as 0.92 dollars instead of 92 per hundred, or mixing nominal and cash amounts.
Final Answer: $ 115000