Question

Rogoff Co.'s 14-year bonds have an annual coupon rate of 7.9%. Each bond has face value of R1015 and makes semi-annual interest payments. If you require an 9.6% nominal yield to maturity on this investment.

What is the maximum price you should be willing to pay for the bond? R

Answer 1

No of periods = 14 years * 2 = 28 semi-annual periods

Coupon per period = (Coupon rate / No of coupon payments per year) * Face value

Coupon per period = (7.9% / 2) * R1015

Coupon per period = $40.0925

Bond Price = Coupon / (1 + YTM / 2)^period + Face value / (1 + YTM / 2)^period

Bond Price = R40.0925 / (1 + 9.6% / 2)¹ + R40.0925/ (1 + 9.6% / 2)² + ...+ R40.0925 / (1 + 9.6% / 2)²⁸ + R1015 / (1 + 9.6% / 2)²⁸

Using PVIFA = ((1 - (1 + Interest rate)^{- no of periods}) / interest rate) to value coupons

Bond Price = R40.0925  * (1 - (1 + 9.6% / 2)^-28) / (9.6% / 2) + R1015 / (1 + 9.6% / 2)²⁸

Bond Price = R610.51 + R273.12

Bond Price = R883.63