Question

You have an interest in a typical US corporate bond that pays a 6.0% coupon rate...

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?

Homework Answers

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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