Question

Assume that you are considering the purchase of a 7-year bond with an annual coupon rate...

Assume that you are considering the purchase of a 7-year bond with an annual coupon rate of 4.5%. The bond has face value of $1,000 and makes semiannual interest payments. If you require an 12.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Homework Answers

Answer #1

Since, the bond pays semiannual interest payments, all the information given needs to be converted in terms of 6 months.

Duration = 7 years = 14 half-years

Interest per year = 1,000 * 4.5% = $45

Interest per half-year = 45/2 = $22.5

Required rate of return = 12% p.a. i.e., 6% per half-year.

Redemption value = $1,000

Therefore, the maximum price that can be paid for the bond = $651.44

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