You are considering the purchase of a 15-year $1,000 face value bond that pays interest of $90 annually . If you required a return of 10%, how much should you be willing to pay for this bond?

Question

Quizplus · Accepted Answer

The bond is paying annual interest of $90 for 15 years, which means total interest payments of $1,350 ($90 x 15).

To calculate the fair price of the bond, we need to use the present value formula:

PV = FV/(1+r)^n + (Annual Interest / r) x [1 - 1/(1+r)^n]

PV = 1,000/(1+0.1)^15 + (90 / 0.1) x [1 - 1/(1+0.1)^15]
PV = $626.05 + $297.89
PV = $923.94

Therefore, the fair price to pay for this bond, given a required return of 10%, is $923.94. Choice B is the correct answer.

You Are Considering the Purchase of a 15-Year $1,000 Face