Question

4. What should be the purchase price of a $1,000 bond redeemable at 105 and bearing semi-annual coupons at 9.75%, if it is sold two years before maturity and money is worth 11%, compounded annually?

Answer 1

Answer to Question #38592 - Math - Other:

Question.

What should be the purchase price of a $1,000 bond redeemable at 105 and bearing semi-annual coupons at 9.75%, if it is sold two years before maturity and money is worth 11%, compounded annually?

Solution.

V purchase price ?

C redemption price 105

R periodic interest payment 9,75%

n time in periods to maturity 4

i yield rate 11%

$$V = C((1 + i)^{-n}) + \frac{R(1 - (1 + i)^{-n})}{i}$$ $$V = 691.97$$