Question

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

$

Answer 1

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

here,

r =9.51%

=>0.0951.

n = 5 years

present value of annuity = [1-(1.0951)^(-5)]/0.0951

=>[0.3650623/0.0951]

=>3.83872029.

interest payment = $1000*4.86%=>$48.60.

present value factor = 1/(1+r)^n

=>0.63493769

amount willing to be paid =[3.83872029*$48.60]+ [0.63493769*1000]

=>186.561806+634.93769

=>$821.50

Pierre should be willing to pay = $821.50.