An investor just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid every six months. If the investor expects to earn a 10 percent simple rate of return on this bond, how much should the investor pay for it?

Question

Quizplus · Accepted Answer

The investor should pay $875.38 for the bond to achieve a 10 percent simple rate of return. This is calculated by finding the present value of the bond's cash flows (interest payments and principal repayment) discounted at the investor's required rate of return (10% per annum, but since payments are semi-annual, 5% per period).

An Investor Just Purchased a 10-Year, $1,000 Par Value Bond