Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If an investor requires a simple annual rate of return of 12 percent with quarterly compounding, how much should the investor be willing to pay for this bond?

Question

Quizplus · Accepted Answer

First, we need to determine the total number of quarters in 15 years:
15 years * 4 quarters/year = 60 quarters
Next, we can use the present value formula with quarterly compounding:
PV = (C/r) * (1 - 1/(1+r)^n) where C = $37.50, r = 0.03 (12%/4), and n = 60.
PV = ($37.50/0.03) * (1 - 1/(1+0.03)^60)
PV = $1,207.57
Therefore, the investor should be willing to pay $1,207.57 for this bond. Choice B is the correct answer.

Assume That a 15-Year, $1,000 Face Value Bond Pays Interest