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You are considering buying a semi-annual coupon bond with a stated coupon rate of 14 %...

You are considering buying a semi-annual coupon bond with a stated coupon rate of 14 % (note that the stated rate is in annual terms). There are 23 years to maturity remaining on it. Your required rate of return is 13.0 % per year, How much should you be willing to pay for this bond?

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Answer #1

Information provided:

Par value = Future value= $1,000

Time= 23 year*2 = 46 semi-annual periods

Yield to maturity= 13%/2 = 6.50% per semi-annual period

Coupon rate = 14% /2 = 7%

Coupon payment = 0.07*$1,000 = $70

The current price is calculated by computing the present value.

The present value is computed by entering the below in a financial calculator:

FV= 1,000

N= 46

I/Y= 6.5

PMT = 70

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

The value obtained is 1,072.68.

Therefore, I will be pay $1,072.68 for this bond.

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