Question

Your broker offers to sell for $1,060 a AAA-rated bond with a coupon rate of 5 percent and a maturity of seven years. Given that the interest rate on comparable debt is 4 percent, calculate the bond's price. Assume that the bond pays interest annually. Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar.

$ ______

Is your broker fairly pricing the bond?

_______(Yes or No) , so the bond _____(should or should not) be purchased.

Appendix B

$Appendix_B.jpg$

Appendix D

$Appendix_D.jpg$

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =7

Bond Price =∑ [(5*1000/100)/(1 + 4/100)^k]     +   1000/(1 + 4/100)^7

k=1

Bond Price = 1060

It is fairly priced and should be bought