Question

You are considering a 15-year, $1,000 par value bond. Its coupon rate is 9%, and interest is paid semiannually.

If you require an "effective" annual interest rate (not a nominal rate) of 8.05%, how much should you be willing to pay for the bond? Do not round intermediate steps. Round your answer to the nearest cent.

Answer 1

Value of Bond =

1 1 (1+r)" Coupon * + MaturityValue (1 + r)" 7

Where r is the discounting rate of a compounding period i.e. 7.89%/ 2 = 3.945%

EAR = (1+Nominal Rate / 2 )^2 -1

0.0805 = (1+r/2)^2 -1

1.0805^1/2 = (1+r/2)

1+r/2 = 1.03947101931

r = 7.89%

And n is the no of Compounding periods 15 years * 2 = 30

Coupon 9% /2 = 4.5%

=

1- 45 米 1 (1+0.03945 ) 0.03045 + 1000 (1+0.03945) 130

= 783.36435071 + 313.25058626

= $1096.61

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