Question

ABC Corporation's bonds have a 10-year maturity, a 8.25% coupon rate with interest paid

semiannually, and a par value of $1,000. If your nominal required rate of return on these bonds is

7.75%, what is the maximum price you should be willing to pay for the bond?

Note: Enter your answer rounded to the nearest cent. Do not enter $ or comma in the answer

box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

Answer -

Step - (1) - Information Given -

ABC Corporation's bonds have a 10-year maturity, a 8.25% coupon rate with interest paid semiannually, and a par value of $1000.

Nominal required rate of return on these bonds is 7.75%.

what is the maximum price you should be willing to pay for the bond?

.

Step - (2) - Calculation of the Maximum Price to pay for the Bond -

	Particulars	Formula used	Calculations	Amount($)
A.	Present Value of Bonds Interest Income	p [1 - (1+r)-n / r] p = Bonds semiannual interest = [($1000*8.25%) / 2)] = $41.25 r = Adjusted rate of return = (7.75% / 2) = 3.875% n = Number of period = (10 years * 2) = 20 periods	$41.25[1 - (1+0.03875)-20 / 0.03875]	566.86
B.	Present Value of Face Value of Bond	FV / (1+r)n FV = Face Value of bond = $1000 r = Adjusted rate of return = (7.75% / 2) = 3.875% n = 20	$1000 / (1+0.03875)20	467.50
Maximum Price			A + B	1034.36