Question

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? $1,105.69 $1,133.34 $1,161.67 $1,190.71 $1,220.48

Answer 1

Answer:

$1,105.69

Explanation:

We use the present value formula that is presented on the attachment

Data provided in the question

Future value = $1,000

Rate of interest = 8.4%  ÷ 2 = 4.2%

NPER = 20 years  × 2 = 40 years

PMT = $1,000 × 9.5% ÷ 2  = $47.5

The formula is shown below:

= PV(Rate;NPER;PMT;FV;type)

So, after solving this, the maximum price of the bond is $1,105.69

Answer 2

The maximum price should be $1,105.69

Calculation of the maximum price:

Since

Future value = $1,000

Rate of interest = 8.4%  ÷ 2 = 4.2%

NPER = 20 years  × 2 = 40 years

PMT = $1,000 × 9.5% ÷ 2  = $47.5

Now the following formula should be used.

= PV(Rate;NPER;PMT;FV;type)

So, after applying this, the maximum price of the bond is $1,105.69

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