Morgan Robbins, a private investor, would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has 10 years remaining until maturity.If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Mr.Robbins pay for the bond?

Question

Quizplus · Accepted Answer

To calculate the price of the bond, we use the formula:
Price = (C / r) x [1 - 1 / (1 + r)^n] + FV / (1 + r)^n
where C = coupon payments per year, r = yield to maturity, n = number of years remaining until maturity, and FV = face value of the bond.

Plugging in the given values, we get:
Price = (80 / 0.06) x [1 - 1 / (1 + 0.06)^10] + 1000 / (1 + 0.06)^10
= $1,147.20

Therefore, Mr. Robbins will pay $1,147.20 for the bond.

Morgan Robbins, a Private Investor, Would Like to Purchase a Bond