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How much would you be willing to pay for a $1,000 par value bond paying $40...

How much would you be willing to pay for a $1,000 par value bond paying $40 interest every six months and maturing in 20 years, assuming you wanted to earn a 9% rate of return?

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Answer #1

Information provided:

Par value= future value= $1,000

Semi-annual payment= $40

Time= 20 years*2= 40 semi-annual periods

Interest rate= 9%/2= 4.5% per semi-annual period

The amount to be paid for the bond is calculated by computed by calculating the present value of the bond.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 40

N= 40

I/Y= 4.5

Press the CPT key and PV to compute the present value.

The value obtained is 907.99.

Therefore, the amount to be paid for the bond is $907.99 $908.

In case of any query, kindly comment on the solution.

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