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 |

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