Question

You are thinking about buying a bond that offers a coupon rate of 6% but with semi-annual coupon payments. The bond has exactly 7 years remaining to maturity. The face value of the bond is $1,000. Your required return is 8.16% per year. How much should you be willing to pay for this bond? 1,211.2625

Answer 1

Answer:

Present price of bond = $886.5165

Explanation:

As for the information provided:

Coupon rate = 6% paid semiannually.

Interest = $1,000 $\times \frac{6}{100} \times \frac{6}{12}$ = $30

Since paid semiannually, effective return rate = 8.16/2 = 4.08%

Time period = 7 years $\times$ 2 = 14 periods

Future value of interest = Future annuity Value @ 4.08% for 14 periods =

$\frac{1}{(1+0.0408)^1} + \frac{1}{(1+0.0408)^2} + \frac{1}{(1+0.0408)^3} + \frac{1}{(1+0.0408)^4} + \frac{1}{(1+0.0408)^5} + ............ + \frac{1}{(1+0.0408)^1^4}$ = 10.50755

Interest value = $30 $\times$ 10.50755 = $315.2265

Principal = $1,000 $\times \frac{1}{(1 + 0.0408)^1^4}$ = $1,000 $\times$ 0.57129

= $571.29

Present price of bond = $571.30 + $315.228 = $886.5165.