5. A $10,000 bond carries a 9% coupon and is 12 years from maturing. .,,..

Question

5. A $10,000 bond carries a 9% coupon and is 12 years from maturing. If prevailing interest rates are 3%, what would you be willing to pay for the bond

Answer 1

This is a yield-to-maturity calculation, which is done easily with a financial calculator but is a bit more cumbersome by hand. We have to discount the future cash flows back to the present using an annual discount factor of 3% or a semi-annual factor of 1.5% for 12 years or 24 payment periods.

So...

24 payment periods of $45 per period (half of the coupon) and

24 periods for the future maturity value of $10,000

Using that 1.5% (half of 3%) discount rate

Results in $8,641.33 present value or price assuming an efficient market.