Question

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 10.7% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

	a.	$874.74
	b.	$721.44
	c.	$1,000.99
	d.	$901.80
	e.	$910.81

Answer 1

Future value= $1,000

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

Yield to maturity= 10.70%/2= 5.35%

Coupon payment= 9.5%/2= 4.75 0.0475*1,000= 47.50

The following has to be entered in the financial calculator to calculate the maximum price to be paid for the bond:

FV= 1,000; N= 40; I/Y= 5.35; PMT= 47.50

Press CPT and PV to calculate the maximum price to be paid for the bond.

The maximum price to be paid for the bond is $901.80.

Therefore, the answer is option c.