You are considering purchasing a $2,000, 20-year, 8% bond. Interest is paid semi-annually and comparable issues with similar risk are yielding 7%. If the bond has 12 years until maturity, what is the most you should pay for the bond today?

Question

You are considering purchasing a $2,000, 20-year, 8% bond. Interest is paid semi-annually and comparable issues with similar risk are yielding 7%.  If the bond has 12 years until maturity, what is the most you should pay for the bond today?

Quizplus · Accepted Answer

The bond's price is calculated using the present value of its future cash flows, which include semi-annual interest payments and the principal at maturity. With a yield of 7% (3.5% semi-annually), the bond's price is higher than its face value due to its higher coupon rate of 8% (4% semi-annually). Calculating the present value of these cash flows results in a price of approximately $2,161.

You Are Considering Purchasing a $2,000, 20-Year, 8% Bond