Question

g Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a simple annual rate of return of 12 percent, with quarterly compounding, how much should you be willing to pay for this bond

Answer 1

Answer:

I will pay $1,207.56 for this bond.

Explanation:

Price of the bond is the present value of all cash flows of the bond. Price of the bond is calculated by following formula:

According to given data

Coupon payment = C = $37.5

Number of periods = n = 4 x 15 years = 60 periods

Current Yield = r = 12% / 4  = 3% semiannually

Price of the Bond = $37.5 x [ ( 1 - ( 1 + 3% )^-60 ) / 3% ] + [ $1,000 / ( 1 + 3% )^60 ]

Price of the Bond = $37.5 x [ ( 1 - ( 1.03 )^-60 ) / 0.03 ] + [ $1,000 / ( 1.03 )^60 ]

Price of the Bond = $1,037.83 + $169.73

Price of the Bond = $1,207.56