Question

In: Finance

Assume that VCU is considering the purchase of a 20-year, noncallable bond with an annual coupon...

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?

Solutions

Expert Solution

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.


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