Suppose you require an annual interest rate of 7% from all your bond investments. You plan...

Suppose you require an annual interest rate of 7% from all your bond investments. You plan to purchase the following bond and hold on to it till maturity. Coupon Rate: 5.1% Maturity Date: 10/15/2034 Par value: $1,000

What should be the maximum price you pay for it now (i.e., 10/15/2020) so that you earn no less than the required 7% per year?

Solutions

Expert Solution

Information provided:

Par value= future value= $1,000

Time= 15 October 2034 - 15 October 2020 = 14 years

Coupon rate= 5.1%

Coupon payment= 0.051*1,000= $51

Yield to maturity= 7%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 51

I/Y= 7

N= 14

Press the CPT key and PV to compute the present value.

The value obtained is 833.84.

Therefore, I will pay a maximum price of $833.84 for the bond today.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

You plan to borrow $100,000 at a 10% annual interest rate. The terms require you to...

You plan to borrow $100,000 at a 10% annual interest rate. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 1?

You plan to borrow $100,000 at a 4.5% annual interest rate. The terms require you to...

You plan to borrow $100,000 at a 4.5% annual interest rate. The terms require you to amortize the loan over 15 years what is monthly payment and how much total interest would you be paying during the Year 1?

A bond has annual coupon rate of 7%, with interest paid semiannually. The bond matures in...

A bond has annual coupon rate of 7%, with interest paid semiannually. The bond matures in seven years. At a market discount rate of 5%, the price of this bond per 100 of par value is closest to: Round your answer to 2 decimal places.

Bob borrowed $10,000 at an effective annual rate of interest of 7%. Bob’s plan was to...

Bob borrowed $10,000 at an effective annual rate of interest of 7%. Bob’s plan was to repay the loan with equal principal repayments plus interest at the end of each year for 20 years. After the 10th payment, Bob decides to change his payment scheme and pay the outstanding balance with equal annual payments. The loan will still be repaid in 20 years. Calculate the difference between the 10th and 11th payment. Less than 174 At least 174, but less...

You plan to apply for a loan from Bank of America. The nominal annual interest rate...

You plan to apply for a loan from Bank of America. The nominal annual interest rate for this loan is 13.89 percent, compounded daily (with a 365-day year). What is the effective annual rate, or EAR (annual percentage yield), of this loan?

Suppose you plan to retire in 40 years. If you make 10 annual investments of $...

Suppose you plan to retire in 40 years. If you make 10 annual investments of $ 1,000 into your retirement account for the first 10 years, and no more contributions to the account for the remaining 30 years. If the retirement account earns a fixed 5% annual interest, how much will you have at your retirement? Round it to two decimal places without the $ sign, e.g., 1234567.89.

Suppose that you plan to have the following investments: $1,000 annually on your

Suppose that you plan to have the following investments:$1,000 annually on your 23rd through 30th birthdays -- a total of eight investments. Also, suppose that the interest rate for the year between your 23rd and 24th birthdays is expected to be 4.0% per annum and that this rate will increase by 0.25% each year thereafter until your 31st birthday.a. How much would you have on your 31st birthday?b. What single rate, compounded annually, from your 23rd through 31st birthdays would...

Suppose you borrow $11,000 at an annual interest rate of 7% compounded monthly over 36 months....

Suppose you borrow $11,000 at an annual interest rate of 7% compounded monthly over 36 months. At the end of the first year, after 12 payments, you want to pay off the remaining balance in 8 equal MONTHLY installments. If the interest rate and the compounding frequency remain the same, how much is each of the 8 payments.

Please explain all the steps of the solution thoroughly. Bond contract rate = 7% semi-annual Bond...

Please explain all the steps of the solution thoroughly. Bond contract rate = 7% semi-annual Bond par = $10,000 Bond market rate = 6% semi-annual Bond life = 10 years Find the selling price of this bond Will it be sold at a discount or premium? Do the journal entry for the issuance Calculate the discount/premium amortization per period (use the straight-line method) Do the entry for the payment of cash interest per period Do the entry for the amortization of the discount/premium...

Suppose a semiannual coupon bond with a 7% annualized coupon rate has an annual yield of...

Suppose a semiannual coupon bond with a 7% annualized coupon rate has an annual yield of 5% compounded semiannually. It matures in 10 years to its face of $10,000. 1)Compute the price. 2) What its modified duration?

Subjects