Question

3. Assume that you want to purchase a 10-year bond, with an annual coupon rate of 13%, a face value of $100 and semiannual interest payments. If the market interest rate is 9%, what is the maximum price you would pay for the bond

Answer 1

Answer:

$126.02

Explanation:

We use the present value formula to determine the maximum price pay for the bond which is shown in the attached spreadsheet.

Given that,  

Future value = $100

Rate of interest = 9%  ÷ 2 = 4.5%

NPER = 10 years  × 2 = 20 years

PMT = $1,000 × 13% ÷ 2  = $6.5

The formula is shown below:

= -PV(Rate;NPER;PMT;FV;type)

So, after solving this, the maximum price is $126.02