Question

Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of 9.5%. The bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Answer 1

Answer:

We are going to pay  $892.137 or less for the bonds.

Explanation:

We need to calculate the present value of the bond at 11% interet rate

Cashflow from the bond:

Principal x interest = interest service

1,000 x 9.5% = 95

Present value of annuity of 95 during 15 year at 11%

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

$95 * \frac{1-(1+.11)^{-15} }{.11} = PV$

Present value of the interest service 683,1326097

Second we have to calculate the present value of the 1,000 principal in 15 years

$\frac{Amount}{(1+rate)^{time}} ) = PV$

$\frac{1,000}{(1+0.11)^{15}} ) = PV$

209.0043467

Finally we add both together for the present value fothe bond at our rate

209.0043467+ 683,1326097 = 892.1369564 = 892.137