Question

Find the price a purchaser should be willing to pay for the given bond. Assume that the coupon interest is paid twice a year. $18000 bond with coupon rate 4% that matures in 5 years current interest rate is 3%. The purchaser should be willing to pay?

Answer 1

Note :  Price a purchaser should be willing to pay for the bond = Present value for the bond

Present value for the bond = Semi annual interest * PVIFA _{( R / 2 , [n *2] )} + Maturity value* PVIFA _{( R / 2 , [n *2] )}

where , r = current interest rate , n = terms of bounds

= ( $18000 * 4% * 6 / 12) * PVIFA _{(1.5 % , 10 years )} + $18000 * PVIFA_{(1.5 % , 10 years )}

= $360 * 9.222 + $18,000 * 0.862= $3,320 + $15,516 = $18,836

Thus, the price a purchaser should be willing to pay for the given bond is $18,836