Pierre Dupont just received a cash gift from his grandfather. He
plans to invest in a five-year bond issued by Venice Corp. that
pays an annual coupon of 4.86 percent. If the current market rate
is 9.51 percent, what is the maximum amount Pierre should be
willing to pay for this bond? (Round answer to 2
decimal places, e.g. 15.25.)
|Pierre should pay||$|
price of the bond = [present value of annuity* interest payment] + [present value factor * face value]
face value =$1000 (default face value)
present value of annuity = [1-(1+r)^(-n)]/r
n = 5 years
present value of annuity = [1-(1.0951)^(-5)]/0.0951
interest payment = $1000*4.86%=>$48.60.
present value factor = 1/(1+r)^n
amount willing to be paid =[3.83872029*$48.60]+ [0.63493769*1000]
Pierre should be willing to pay = $821.50.
Get Answers For Free
Most questions answered within 1 hours.