Question

In: Economics

Suppose that you want to buy a bond with a face value of $10,000. The bond...

Suppose that you want to buy a bond with a face value of $10,000. The bond has annual coupon payments at a 20% interest on its face value each year. If you want a yield to maturity of 16%, what will be the maximum price of the bond? (Select the closest answer) (The bond matures in 10 years and the first payment will be received in one year.)

  • A. $23589.1
  • B. $11933.3
  • C. $10946.7
  • D. $12369.8

Solutions

Expert Solution

Ans: $11,933.3

Explanation:

Annual coupon amount = 0.20 * 10000 = 2,000

Present value of the bond = 2000(P/A, 16%, 10) + 10,000(P/F, 16%, 10)

                                         = 2000(4.83323) + 10,000(0.22668)

                                         = 9,666.46 + 2,266.8

                                         = $11,933.3

Thus, the maximum price of the bond will be $11,933.3.

Rahul Sunny answered 7 months ago
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