Purchase price of bond

Question

What is the purchase price of a $1,000 bond that is maturing in 20 years at 12% interest if the required rate of return is 15%?

Answer 1

There is no mention of the coupon payment frequency in the question. I am going to assume semi-annual payments. The coupon payments will be $1000*12%/2 = $60. There will be 40 of them plus the par value on the the 40th payment. You want to discount these cash flows with a nominal annual rate of 15% or 7.5% for 6 months. You can do this in a spreadsheet and get $811.08. You could also use Excel's PRICE function and get the same answer.

Answer 2

Hey C -- if we buy the 1k bond at $900, we get 13.2% interest and 11% cap gain spread over the 20yrs -> not quite 14% combined ... if we buy at $800, we get 15% interest plus cap gain ==> buying at $850 will likely do it :)