Question

Creative Financing, Inc., is planning to offer a $1,000 par value 18-year maturity bond with a coupon interest rate that changes every 6 years. The coupon rate for the first 6 years is 12 percent, 14 percent for the next 6 years, and 16 percent for the final 6 years. If you require an 11 percent rate of return on a bond of this quality and maturity, what is the maximum price you would pay for the bond? (Assume interest is paid annually at the end of each year.) Use Table II and Table IV to answer the question. Round your answer to the nearest dollar.

$

Answer 1

The price is computed as shown below:

= Present value of coupon payments + Present value of par value

= $ 120 / 1.11¹ + $ 120 / 1.11² + $ 120 / 1.11³ + $ 120 / 1.11⁴ + $ 120 / 1.11⁵ + $ 120 / 1.11⁶ + $ 140 / 1.11⁷ + $ 140 / 1.11⁸ + $ 140 / 1.11⁹ + $ 140 / 1.11¹⁰ + $ 140 / 1.11¹¹ + $ 140 / 1.11¹² + $ 160 / 1.11¹³ + $ 160 / 1.11¹⁴ + $ 160 / 1.11¹⁵ + $ 160 / 1.11¹⁶ + $ 160 / 1.11¹⁷ + $ 160 / 1.11¹⁸ + $ 1,000 / 1.11¹⁸

= $ 1,171 Approximately

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