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 11% per year componded 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

Answer 1

Solution-

Bond rate = 6.6% or 6.6%/2 = 3.3% Semiannualy

Semiannual coupon payment = ($10000 * 3.3%)

= $330

Nominal yield = 11% or 11%/2 =5.5% Semiannualy

n = 5 Years or 10 Semiannual Year

The price of the bond = $9500

Price = Present value of coupon payments + Present value of final principal payment

Price = C [1-(1+r)^-n /r ] + Selling Price/(1+r)ⁿ

$9500 = $330 * [1-(1+5.5%)^-10 / 5.5% ] + Selling Price / (1+5.5%)¹⁰

$9500 = $330 * 7.53757 + Selling Price /1.70814

Selling Price = $11978.50

Ans :- Therefore , the minimum selling price for the bond is $11979 (round to nearest dollar) .