Timothy has an opportunity to buy a $4,000 par value municipal bond with a coupon rate of
6% and a maturity of five years. The bond pays interest annually. If Timothy requires a return of 8%,
what should he pay for the bond?
If Timothy requires a return of 8%,
the amount he should pay for the bond is ??
(Round to the nearest cent.)
Annual coupon=4000*6%=240
Hence price of bond=Annual coupon*Present value of annuity factor(8%,5)+$4000*Present value of discounting factor(8%,5)
=240*3.992710037+$4000*0.680583197
=$3680.58(Approx).
NOTE:
1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=240[1-(1.08)^-5]/0.08
=240*3.992710037
2.Present value of discounting factor=4000/1.08^5
=4000*0.680583197
Timothy has an opportunity to buy a $4,000 par value municipal bond with a coupon rate...