Question

Apple, Inc’s 15-year bonds have an annual coupon rate of 11%. Each bond has face value of $1,000 and makes semiannual 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? (2pts)

a. $1,063

b. $1,147

c. $1,119

d. $1,000

Answer 1

The current bond price is computed as shown below:

The coupon payment is computed as follows:

= 11% / 2 x $ 1,000 (Since the payments are semi annual, hence divided by 2)

= $ 55

YTM is computed as follows:

= 9.5% / 2 (Since the payments are semi annual, hence divided by 2)

= 4.75% or 0.0475

N is computed as follows:

= 15 x 2 (Since the payments are semi annual, hence multiplied by 2)

= 30

So, the price of the bond will be computed as follows:

Bonds Price = Coupon payment x [ [ (1 - 1 / (1 + r)ⁿ ] / r ] + Par value / (1 + r)ⁿ

= $ 55 x [ [ (1 - 1 / (1 + 0.0475)³⁰ ] / 0.0475 ] + $ 1,000 / 1.0475³⁰

= $ 55 x 15.82041827 + $ 248.5301322

= $ 1,119 Approximately

So, the correct answer is option c

Feel free to ask in case of any query relating to this question