Question

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semi-annual interest payments. If you require a yearly 7.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Group of answer choices

$1,262.11

$1,217.43

$1,126.76

$1,161.67

Answer 1

Information provided:

Face value= future value= $1,000

Coupon rate= 9.5%/2= 4.75%

Coupon payment= 0.0475*1,000= $47.50

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

Yield to maturity= 7.4%/2= 3.70% per semi-annual period

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PMT= 47.50

N= 40

I/Y= 3.70

Press the CPT key and PV to compute the maximum price of the bond.

The value obtained is 1,217.43.

Therefore, the maximum price of the bond is $1,217.43.

Hence, the answer is option b.