Devine Divots issued a bond a few years ago that has a face value equal to R1,000 and pays investors R30 interest every six months.The bond has eight years remaining until maturity.If you require a 7 percent rate of return to invest in this bond, what is the maximum price you should be willing to pay to purchase the bond?

Question

Quizplus · Accepted Answer

To calculate the maximum price an investor should be willing to pay for the bond, we need to find the present value of the future cash flows (interest payments and face value) discounted at the required rate of return (7%). Using the formula for the present value of a bond:

PV = (C/r)(1 - 1/(1+r)^n) + FV/(1+r)^n

where PV is the present value, C is the coupon payment, r is the required rate of return, n is the number of periods, and FV is the face value.

Plugging in the values from the problem, we get:

PV = (30/0.035)(1 - 1/(1+0.035)^16) + 1000/(1+0.035)^16
PV = 857.14 + 82.39
PV = R939.53

Therefore, the maximum price an investor should be willing to pay for the bond is R939.53, which is choice (B).

Devine Divots Issued a Bond a Few Years Ago That