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Lucy Lampkin wants to purchase a bond with a face value of $7,000 and a bond...

Lucy Lampkin wants to purchase a bond with a face value of $7,000 and a bond rate of 7.5% per year, payable at 3.75% semiannually. The bond has a remaining life of 5 years. If Lucy wants to earn at least 7.5% per year compounded semiannually, what is the maximum price she would be willing to pay to purchase the bond?

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Answer #1

Maximum price she would be willing to pay is equal to the present value of Coupon payments as well as the principal amount

Since the required rate of return is equal to the coupon rate, maximum price she would we willing to pay is equal to the face value of bond i.e. $7,000

Calculation

Price = 7,000*3.75%*PVAF(3.75%, 10 periods) + 7,000PVF(3.75%, 10 periods)

= 262.5*8.213 +7,000*0.692

= $7,000

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