Assume that you wish to purchase a 30-year bond that has a maturity value of $1,000 and a coupon interest rate of 9.5%,paid semiannually.If you require a 6.75% rate of return on this investment,what is the maximum price that you should be willing to pay for this bond?

Question

Quizplus · Accepted Answer

Using the bond valuation formula:
P= C/(1+r)^1 + C/(1+r)^2 + ... +C/(1+r)^n + M/(1+r)^n

Where:
P = Price of bond
C = Coupon payment
r = Required rate of return
n = Number of periods
M = Maturity value

Substituting the given values:
P = 47.50/(1.035)^1 + 47.50/(1.035)^2 + ... + 47.50/(1.035)^60 + 1,000/(1.035)^60
P = 47.50[1-(1/(1.035)^60)]/0.035 + 1,000/(1.035)^60
P = $1,351.90

Therefore, you should be willing to pay a maximum of $1,351.90 for this bond. Answer C is the closest choice to this value.

Assume That You Wish to Purchase a 30-Year Bond That