Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)
A) $951
B) $882
C) $1,033
D) $1,195

Question

Quizplus · Accepted Answer

The bond's price is calculated using the present value of its future cash flows, which include semiannual coupon payments and the face value at maturity. Given the coupon rate is higher than the market rate, the bond will be priced above its face value. Calculating the present value of the bond's cash flows using the market rate of 9% (4.5% semiannual) results in a price of approximately $1,195.

Jeremy Kohn Is Planning to Invest in a 10-Year Bond