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Question 14 You are considering buying a 10-year, $1,000 par value bond issued by IBM. The coupon rate is 8% annually, with i

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Answer #1

Price of Bond =PV of CFs from it.

Period CF PVf @5% Disc CF
1 $      40.00     0.9524 $   38.10
2 $      40.00     0.9070 $   36.28
3 $      40.00     0.8638 $   34.55
4 $      40.00     0.8227 $   32.91
5 $      40.00     0.7835 $   31.34
6 $      40.00     0.7462 $   29.85
7 $      40.00     0.7107 $   28.43
8 $      40.00     0.6768 $   27.07
9 $      40.00     0.6446 $   25.78
10 $      40.00     0.6139 $   24.56
11 $      40.00     0.5847 $   23.39
12 $      40.00     0.5568 $   22.27
13 $      40.00     0.5303 $   21.21
14 $      40.00     0.5051 $   20.20
15 $      40.00     0.4810 $   19.24
16 $      40.00     0.4581 $   18.32
17 $      40.00     0.4363 $   17.45
18 $      40.00     0.4155 $   16.62
19 $      40.00     0.3957 $   15.83
20 $      40.00     0.3769 $   15.08
20 $ 1,000.00     0.3769 $ 376.89
Price of Bond $ 875.38

Option B is correct.

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