Question

Maxwell Company bonds have a coupon rate of 5%, a par value of $1,000, and will mature in 8 years. If you require a return of 6%, what would you be willing to pay for a Maxwell Company bond?

Answer 1

-Inderdhanush Page No. DATE: Bond price will be calculated by simply discount the known future Cash flows. aux clis too late Cash flows would be as follows a Coupan Payment: Yearly = $1000x50% - $50 Principle Payment at the end of Bond Ilife is & 1000 Bond Prices would be calculated usily the following formula, Po = S Ch & P Where coo Po & Price of Bond at, t ot (n = Yearly Coupan Payments ONTM at Yield to Matunty or Also - 6 oo known as required Return P = Principle Payment on Matunity. i s luterest rate or Reewired Retum n a No. of Period or Marunty years

Inderdhanush Page No. DATE: using the formula Po = $50 $50 (1.06) $50 & $50 + (1.06)2 a $50 (1.06)6 $50 (1.06) 3 + $50 (1.06)7 (1.06) 9 ] + $50 (1.068 (1.06) $10008 (1.068 Po = $50x6.2097 +1000x0.6274 = 937.89 Therefore Po is $937.89. Hence we will willing to to pay. Maximum of $ 937.89 for a Maxwell Company. Bond at t=0