Question

You have just purchased a municipal bond with a $10,000 par value for $9,500. You purchased it immediately after the previous owner received a semiannual interest payment. The bond rate is 6.6% per year payable semiannually. You plan to hold the bond for 3 years, selling the bond immediately after you receive the interest payment. If your desired nominal yield is 5.5% per year compounded semiannually, what will be your minimum selling price for the bond?

Answer 1

Answer:

The investor will sale the bond as low as : 9,064.39 to achieve their 5.5% return on investment

Explanation:

To yield 5.5% then the purchase price of 9,500 should mathc the discounted value of the coupon payment and the selling price of the bonds:

$9,500 = PV of coupon payment + PV selling price$

PV o the coupon payment:

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

C 660.00

time 3

rate 0.055

$660 \times \frac{1-(1+0.055)^{-3} }{0.055} = PV$

PV $1,780.6360

$9,500 - 1,780.64 = \frac{Sales \: Price}{(1 + rate)^{time} }\\7,719.36(1 + 0.055)^{3} = Selling Price$

Sales price: 9,064.39