Question

QUESTION #5 – BOND CALCULATIONS (10 Marks)

Harriet is considering the purchase of a RIM Corp. bond with a face value of $20,000 and 20 years remaining to maturity. The coupon rate on the bond is 5% while the current market interest rate is 7%.

REQUIRED:

What price should Harriet pay for the RIM Corp. bond? Show all of your calculations.

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =20

Bond Price =∑ [(5*20000/100)/(1 + 7/100)^k]     +   20000/(1 + 7/100)^20

k=1

Bond Price = 15762.39