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 9.5% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? a. $1,140.00 b. $1,010.00 c. $1,000.00 d. $1,220.00 e. $980.00

• A. a
• B. b
• C. c
• D. d
• E. e

Answer 1

Information provided:

Face value=future value= $1,000

Time= 20 years*2= 40 semi-annual periods

Yield to maturity= 9.5%/2= 4.75%

Coupon rate= 9.5%/2= 4.75%

Coupon payment= 0.0475*1,000= $47.50

The price of the bond is computed by entering the below in a financial calculator:

FV= 1,000

N= 40

I/Y= 4.75

PMT= 47.50

Press the CPT key and PV to compute the price of the bond.

The value obtained is 1,000.

Therefore, the maximum price I will be willing to pay is $1,000.

Hence, the answer is option c.

In case of a query, kindly comment on the solution.