Question

Question 14 You are considering buying a 10-year, $1,000 par value bond issued by IBM. The coupon rate is 8% annually, with interest being paid semiannually. If you expect to earn a 10% rate of return on this bond, what is the maximum price you should be willing to pay for this IBM bond? O $189.93 $875.39 $898.54 $911.46

Answer 1

Price of Bond =PV of CFs from it.

Period	CF	PVf @5%	Disc CF
1	$      40.00	0.9524	$   38.10
2	$      40.00	0.9070	$   36.28
3	$      40.00	0.8638	$   34.55
4	$      40.00	0.8227	$   32.91
5	$      40.00	0.7835	$   31.34
6	$      40.00	0.7462	$   29.85
7	$      40.00	0.7107	$   28.43
8	$      40.00	0.6768	$   27.07
9	$      40.00	0.6446	$   25.78
10	$      40.00	0.6139	$   24.56
11	$      40.00	0.5847	$   23.39
12	$      40.00	0.5568	$   22.27
13	$      40.00	0.5303	$   21.21
14	$      40.00	0.5051	$   20.20
15	$      40.00	0.4810	$   19.24
16	$      40.00	0.4581	$   18.32
17	$      40.00	0.4363	$   17.45
18	$      40.00	0.4155	$   16.62
19	$      40.00	0.3957	$   15.83
20	$      40.00	0.3769	$   15.08
20	$ 1,000.00	0.3769	$ 376.89
Price of Bond			$ 875.38

Option B is correct.