Question

You have an interest in a typical US corporate bond that pays a 6.0% coupon rate and has exactly 8 years until maturity. Your opportunity cost of invested funds is 8.5%. What is the most you would pay for this bond?

Answer 1

Assuming par value of 1000

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =8

Bond Price =∑ [(6*1000/100)/(1 + 8.5/100)^k]     +   1000/(1 + 8.5/100)^8

k=1

Bond Price = 859.02 = max price to pay