Question

You have just bought a 10-year security that pays $500 every six months. Another equally risky security also has a maturity of 10 years, and pays 10%, compounded monthly (that is, the nominal rate is 10%). What price should you have paid for the security that you just purchased?

Answer #1

The question is solved by calculating the present value of the bond.

Future value= $1,000

Time= 10 years*2= 20 semi-annual periods

Yield to maturity= 10%/2= 5%

Semi-annual payment= $500

The present value of the bond is calculated by entering the below in a financial calculator:

FV= 1,000; N= 20; I/Y= 5; PMT= 500

Press CPT and PV to calculate the present value of the bond.

The present value of the bond
**is $6,607.9967 $6608.**

Therefore, $6608 should have been paid for the bond just purchased.

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