Robbin, 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 ten years remaining until maturity.If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Robbin pay for the bond?

Question

Quizplus · Accepted Answer

To calculate the price that Robbin will pay for the bond, we need to use the present value formula:

PV = (C / r) x [1 - (1 / (1 + r)^n)] + (F / (1 + r)^n)

Where:
PV = Present value of the bond
C = Coupon payment per year = $80
r = Annualized yield = 6% = 0.06
n = Number of years until maturity = 10
F = Par value of the bond = $1,000

Plugging in these values, we get:

PV = (80 / 0.06) x [1 - (1 / (1 + 0.06)^10)] + (1,000 / (1 + 0.06)^10)
PV = 1,147.20

Therefore, Robbin will pay $1,147.20 for the bond.

Robbin, a Private Investor, Would Like to Purchase a Bond