Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $46. If you require a 10 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
Given,
Yield to maturity = 10%
Semi annual interest payments =46
Maturity value = 1000
Maturity period = 20 years (*Since interest is paid semi annually we should consider maturity periods as 40 years (20*2))
Calculation of Maximum price payable for the bond:
Particulars | Time period | Cash Flows (1) | Yield to Maturity @10% (2) | Discounted Cash flows (3) (1*2) |
Interest | 1-40 | 46 | 9.7791 | 449.8386 |
Maturity value | 40 | 1000 | 0.0221 | 22.1 |
471.9386 |
Maximum price payable = 472 (Rounded off)
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