Question

"An investor just purchased a 5-year $1,000 par value bond. The coupon rate on this bond is 10% annually, with interest paid every year. If the investor expects to earn 12% simple rate of return, how much the investor should pay for it?"

Please explain the process thoroughly.

Answer #1

Information provided:

Par value= future value= $1,000

Time= 5 years

Coupon rate= 10%

Coupon payment= 0.10*1,000= $100 per semi-annual period

Yield to maturity= 12%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 100

I/Y= 12

N= 5

Press the CPT key and PV to compute the present value.

The value obtained is 927.90.

Therefore, the investor should
price the bond at **$927.90.**

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