Question

assume that you were considering the purchase of a 20 year non-callable bond with an annual coupon rate of 9.5% the bond has a face value of $1000 and it makes semi annual interest payments. if you require a 9.5% nominal yield to maturity on this investment what is the maximum price you should be willing to pay for the bond?

Answer 1

Information provided:

Face value= future value= $1,000

Time= 20 years*2= 40 semi-annual periods

Coupon rate= 9.5%/2= 4.75.

Coupon payment= 0.0475*1,000= $47.50 per semi-annual period

Yield to maturity= 9.5%/2= 4.75% per semi-annual period

The maximum 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= 47.50

I/Y= 4.75

N= 40

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

The value obtained is 1,000.

Therefore, the maximum price of the bond is $1,000.