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You are interested in buying a $1,000 par value bond with 20 years to maturity and...

You are interested in buying a $1,000 par value bond with 20 years to maturity and a 8% coupon rate that is paid semiannually. How much should you be willing to pay for the bond if the required rate of return (discount rate) is 10%? (8’)

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Answer #1

Information provided:

Par value= future value= $1,000

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

Coupon rate= 8%/2= 4%

Coupon payment= 0.04*1,000= $40

Discount rate= 10%/2= 5%

The price of the bond is computed by calculating the present value of the bond.

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

FV= 1,000

N= 40

PMT= 40

I/Y= 5

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

The value obtained is 828.41.

Therefore, I would be willing to pay $828.41 for the bond.

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

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