Question

You have just purchased a municipal bond with a $10,000 par value for $9,500. You purchased it immediately after the previous owner received a semiannual interest payment. The bond rate is 6.6% per year payable semiannually. You plan to hold the bond for 5 years, selling the bond immediately after you receive the interest payment If your desired nominal yield is 2% per year compounded semiannually, what will be your minimum selling price for the bond? $ Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is 5. Click here to access the TVM Factor Table Calculator Click if you would like to show Work for this question: Open Show Work

Answer 1

Coupon = 10,000*(6.6%/2) = 330

Semiannually = 2%/2 = 1%

n = 5*2 = 10

P = 9500

The minimum selling price for the bond:

P = 330* (P/A, 1%, 10) + F*(P/F, 1%, 10)

9500 = 330*9.471 + F*0.9053

9500 = 3125.43 + F*0.9053

F*0.9053 = 9500 - 3125.43

F = 6374.57 / 0.9053

F = 7041.38959

= 7041.4

Therefore the minimum selling price is $7041