Question

our friend Nancy has a bond that she would like to sell to you. The bond matures in 20 years, has a face value of $1000 and a coupon interest rate of 6%. If you know that the yield to maturity on similar bonds is 8%, what is the maximum price you would be willing to pay for the bond?

Answer 1

$Price = \frac{cpn}{r} * \left [ 1 - \frac{1}{(1+r)^{n}} \right ] + \frac{FV}{(1+r)^{n}}$

$Price = \frac{60}{0.08} * \left [ 1 - \frac{1}{(1+0.08)^{20}} \right ] + \frac{1,000}{(1+0.08)^{20}}$

$Price = 750 * 0.785451793 + 214.5482074041$

$Price = \$803.6370521541$

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