In: Finance
Assume that VCU is considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If VCU require an 9.5% nominal yield to maturity on this investment, what is the maximum price VCU should be willing to pay for the bond?
Information provided:
Face value= future value= $1,000
Time= 10 years*2= 20 semi-annual periods
Coupon rate= 9.5%/2= 4.75%
Coupon payment= 0.0475*1,000= $47.50 per semi-annual period
Yield to maturity= 9.5%/2= 4.75% per semi-annual period
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= 47.50
I/Y= 4.75
N= 20
Press the CPT key and PV to compute the present value.
The value obtained is 1,000.
Therefore, the maximum price that VCU should pay for the bond is $1,000.