Homework Answers
Let, the Semi annual equivalent YTM = x
Hence, (1+x)^2-1=5%
or, x= 2.47%
Now, Below is the cash flow for the above bond:
| Semi-Annual | Coupon Payment | Prinicipal Payment | Present Value (Cash Flow/(1+Interest Rate)^Period) |
| 1 | 20.00 | - | 19.52 |
| 2 | 20.00 | - | 19.05 |
| 3 | 23.75 | - | 22.07 |
| 4 | 23.75 | - | 21.54 |
| 5 | 23.75 | - | 21.02 |
| 6 | 23.75 | - | 20.52 |
| 7 | 23.75 | - | 20.02 |
| 8 | 23.75 | 1,000.00 | 842.24 |
| Total | 985.98 |
Hence, the maximum price you are willing to pay is $985.98
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