Assume that you wish to purchase a bond with a 30-year maturity, an annual coupon rate of 10 percent, a face value of $1,000, and semiannual interest payments. If you require a 9 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Question

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To find the maximum price to pay for the bond, calculate its present value using the required yield to maturity. The bond pays $50 every six months (10% annual coupon rate on $1,000 face value, divided by 2 for semiannual payments). The yield to maturity is 4.5% per period (9% annual yield divided by 2). The bond has 60 periods (30 years times 2). Using the present value formula for bonds, the price is approximately $1,103.19.

Assume That You Wish to Purchase a Bond with a 30-Year