Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a nominal annual rate of return of 12 percent, with quarterly compounding, how much should you be willing to pay for this bond? (Hint: The PVIFA and PVIF for 3 percent, 60 periods are 27.6748 and 0.1697, respectively.)

Question

Quizplus · Accepted Answer

The bond pays $37.50 every quarter, and the required quarterly rate is 3% (12% annual rate divided by 4). The present value of the annuity (interest payments) is $37.50 * 27.6748 = $1,037.78. The present value of the face value is $1,000 * 0.1697 = $169.70. Adding these gives $1,207.48, which is closest to $1,207.57.

Assume That a 15-Year, $1,000 Face Value Bond Pays Interest