Answer:
I will pay $559,864 for this bond
Explanation:
Coupon payment = $500,000 x 6% = $30,000 annually = $15,000 semiannually
Number of periods = 10 years x 2 = 20 period
Interest Rate = 4.5% = 2.25% semiannually
Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula:
Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]
Price of the Bond =$15,000 x [ ( 1 - ( 1 + 2.25% )^-20 ) / 2.25% ] + [ $1,000 / ( 1 + 2.25% )^20 ]
Price of the Bond = $15,000 x [ ( 1 - ( 1.0225 )^-20 ) / 0.0225 ] + [ $500,000 / ( 1.0225 )^20 ]
Price of the Bond = $239,455.68 + $320,408.24 = $559,863.92
Price of the Bond = $559,864
