Question

Your client, Pierre Batistuta has been offered a 10-year, $1,000 par value bond with a 8.8 percent coupon. Interest on this bond is paid semiannually. If Pierre is to earn a nominal rate of return of 10.8 percent, compounded semiannually, how much should he pay for the bond?

Answer 1

Computation of Price of Bond

Face Value = $1,000
Coupon = 8.8% per annum = (8.8 / 2) 4.4 % per period
Period = 10 * 2 = 20
Nominal rate of return = 10.8 / 2 = 5.4%

PVAF = It is sum of annuity factors of n periods. When cash flows are same every year can you present value annuity factor i.e. PVAF to calculate present value of cash flows

Period	Cash Flow	Discount Factor @5.4% [1 / (1 + r)n ]	Present Value of Cash Flows
1-20	44 (1000*4.4%)	12.05016	530.207
20	1000	0.34929	349.29
Price of Bond	$879.497

Ans : He should pay $879.50 for the bond.