Question

Kevin Hall just received a cash gift from his grandfather. He plans to invest in a five-year bond issued by Wildhorse Corp. that pays an annual coupon rate of 4.5 percent. If the current market rate is 8.50 percent, what is the maximum amount Kevin should be willing to pay for this bond?

Answer 1

Price of the Bond

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 4.50%]	PMT	45
Market Interest Rate or Yield to maturity on the Bond [8.50%]	1/Y	8.50
Maturity Period/Time to Maturity [5 Years]	N	5
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $842.37.

“Hence, the maximum amount that the Kevin should be willing to pay for this bond will be $842.37”