You have just purchased a 10-year, R1,000 par value bond.The coupon rate on this bond is 8 percent annually, with interest being paid each 6 months.If you expect to earn a 10 percent simple rate of return on this bond, how much did you pay for it?

Question

Quizplus · Accepted Answer

The bond's price is calculated using the present value of its cash flows, which include semi-annual coupon payments and the par value at maturity. With a 10% annual required return, the semi-annual rate is 5%. The bond's price is the present value of R40 semi-annual payments for 20 periods plus the present value of R1,000 at maturity, discounted at 5% per period. This calculation results in approximately R875.38.

You Have Just Purchased a 10-Year, R1,000 Par Value Bond