Question

Your good friend is looking to buy a bond that pays semi-annual interest. The par value is $1,000 and the coupon rate is 4%. Your friend plans to hold the bond to its maturity, which is 10 years from now. If her required rate of return is 3%, what is the most you recommend your friend pay for the bond? (round to nearest cent)

Answer 1

Information provided:

Par value= future value= $1,000

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

Coupon rate= 4%/2= 2%

Coupon payment= 0.02*1,000= $20

Required rate of return= 3%/2= 1.50%

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:

FV= 1,000

PMT= 20

N= 20

I/Y= 1.50

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

The value obtained is 1,085.84.

Therefore, I would recommend to pay $1,085.84 for the bond.

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