Question

You are considering a 10-year, $1,000 par value bond. Its coupon rate is 10%, and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 9.1085%, how much should you be willing to pay for the bond? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

You need to use a Financial calculator to solve this problem. You can download it.

N = 10* 2 = 20 (The Bond is for 10 Years and semiannual payments, so 20 payments)

PMT => 10% of 1,000 = 100/ 2 = -50 ( The coupon 10% is on Face Value, as semiannual, so divided by 2)

FV = -1,000 (The Face value of bond is $1,000)

I/Y = 9.1085/ 2 = 4.55425 (The rate was given annual, so semiannual will be divided by 2)

CPT + PV = 1057.71

So you will be paying $1057.71 for the bond now.

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