Question

$1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your nominal annual required rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for this bond

Answer 1

Answer:

$1,115.58

Explanation:

Calculation to determine how much should you be willing to pay for this bond

Using this formula

Bond Price​= cupon*{[1 - (1+i)^-n] / i} + [face value/(1+i)^n]

Where,

Par value= $1,000

Cupon= $35

Time= 10*4= 40 quarters

Rate= 0.12/4= 0.03

Let plug in the formula

Bond Price​= 35*{[1 - (1.03^-40)] / 0.03} + [1,000/(1.03^40)]

Bond Price​= 809.02 + 306.56

Bond Price​= $1,115.58

Therefore how much should you be willing to pay for this bond is $1,115.58