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If you require a nominal annual rate of return of 12 percent, then how much should...

If you require a nominal annual rate of return of 12 percent, then how much should you be willing to pay for a $1,000 par value bond that pays annual interest of $80 paid semiannually and matures in 10 years? a. $635.98 b. $770.60 c. $854.29 d. $1,002.85 e. $1,221.47

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Answer #1

Answer: Option (b) $ 770.60

Annual Coupon Payment = $ 80 paid Semi annually
Time to Maturity = 10 Years
Nominal Annual Rate of Return = 12%
Assume Face value of bond = $1,000
Price of Bond = Present Value of all future expected Cashflows
Price of Bond = Present Value of all Coupon Payments and Redemption Amount
Price of Bond = [($ 80/2)* PVAF((12/2)%, (10 * 2 Periods)] + [$1000 * PV((12/2)%,(10*2)period]
Price of Bond = [$ 40 * PVAF( 6%,20 periods)] + [$1,000 * PV(6%, 20 period)]
Price of Bond = [$ 40 * 11.4699] + [$1,000 * 0.3118]
Price of Bond = $ 458.80 + $ 406.80
Price of Bond = $ 770.60
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