Question

Sandra wants to purchase a bond that has a face value of $1000.00, an annual coupon rate of 7%, and a maturity of 10 years. The bond's interest is paid semiannually. Sandra's annual required rate of return is 12%. What will Sandra pay for this bond?

Answer 1

Information provided:

Face value= future value= $1,000

Coupon rate= 7%/2= 3.50%

Coupon payment= 0.035*1,000= $35

Time= 10 years*2= 20 semi-annual periods

Required rate of return= 12%/2= 6%

The price of the bond is calculated by computing the present value of the bond.

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

FV= 1,000

PMT= 35

N= 20

I/Y= 6

The value obtained is 713.25.

Therefore, Sandra will pay $713.25.

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