Question

You are considering a 15-year, $1,000 par value bond. Its coupon rate is 11%, and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 8.42%, 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

Bond Par Value = $1,000

Time to Maturity = 15 years

Coupon Rate = 11% paid semi-annually

EAR = 8.42%

Converting EAR to YTM of semi-annual compounding,

YTM(semi-annual) = 2*((1 + 0.0842)^1/2 - 1)

YTM(semi-annual) = 8.25%

Now calculating Present Value of Bond,

Using TVM calculation,

PV = [FV = 1000, T = 30, PMT = 55, I = 0.0.0825/2]

PV = $1234.20