Question

Ms. Jones wants to make 14​% nominal interest compounded quarterly on a bond investment. She has an opportunity to purchase a 12​%, ​$10 comma 000 bond that will mature in 12 years and pays quarterly interest. This means that she will receive quarterly interest payments on the face value of the bond ​($10 comma 000​) at 12​% nominal interest. After 12 years she will receive the face value of the bond. How much should she be willing to pay for the bond​ today?

Answer 1

Answer:

IF mrs Jones wants to make 14% on the bond this is her required return and what the ytm of the bond should be to make her want to buy the bond. Because the bond pays a coupon of 12% she will want to pay less than the face value of the bond, so that the overall return can be 14%. Whenever the coupon rate of the bond is less than the required return or ytm, the bond is sold at a discount. In order to find at what price should she buy the bond we will need a financial calculator and input the following

FV= 10,000

YTM= 3.5 ( We divide 14 by 4 to find the ytm because the bond has quarterly compounded payments)

PMT= 300 ( We find out the 12% of 10,000 and divide it by 4 because the bond has quarterly payments)

N= 48 (12 years into 4 because there will be a total of 48 quarters and 48 payments)

Put these values in a financial calculator and compute the PV

PV= 8,845

The present value of the bond is 8,845 if the required return is 14% which means she should be willing to pay $8,845 for the bond today.

Explanation: