Question

Consider the bond described below:

• Years to maturity = 15
• Annual coupon rate = 9.5%, paid semiannually.
• Face value = $1,000

If you require an 11.0% nominal yield to maturity, the maximum price you should be willing to pay for the bond is closest to:

	a.	$891.00
	b.	$913.27
	c.	$1,059.51

Answer 1

We know that,

Price of the bond = Present value of all semi-annual coupons and face value discounted at semi-annual ytm.

FV =1000

Semi-annual coupon amount = 0.095 *1000/2 = 47.5

Semi-annual ytm = 0.055

Number of payments = 15*2 = 30

Price of the bond = 47.5/(1+0.055)^1 + 47.5/(1+0.055)^2 + 47.5/(1+0.055)^3 + 47.5/(1+0.055)^4 + 47.5/(1+0.055)^5 +................ 47.5/(1+0.055)^30 + 1000/(1+0.055)^30

Price of the bond = 891 Answer

The option A is correct.

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