Question

Mary wants to purchase a 20-year bond that has a par value of $1,000 and makes semiannual interest payments of $40. If her required yield to maturity is 10%, which of the following is closest to how much should Mary be willing to pay for the bond?

$902

$925

$1000

$828

Answer 1

Solution: Par value semi annual coupon = semi annual yield to maturity = Number of payments = 20*2 1000 40.00 5.00% 40 PV of bond = PV of interest + PV of maturity PV of interest Semi annual interest = X PVIFA(5%,40)** PV of interest 40.00 17.15909 686 PV of maturity value Par value X PVIF(5%,40)** PV of maturity value 1,000.00 0.14205 142 PV of bond/Price of bond 828 17.15909 **PVIFA(5%,40) formula (1-(1.054-40)/0.05 |(1-(1+r)^-n)/r 1/(1.05140) 0.14205 ***PVIF(5%,40) formula = 1/(1+r)^n