A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If an investor's simple annual required rate of return is 12 percent, how much should the investor be willing to pay for this bond?

Question

Quizplus · Accepted Answer

The bond pays $35 quarterly, which is $140 annually. The investor's required rate of return is 12% annually, or 3% quarterly. The bond's present value is calculated using the formula for the present value of an annuity for the interest payments and the present value of a lump sum for the principal. The present value of the interest payments is $35 * [(1 - (1 + 0.03)^-40) / 0.03] and the present value of the principal is $1,000 / (1 + 0.03)^40. Adding these gives approximately $1,115.57.

A $1,000 Par Value Bond Pays Interest of $35 Each