Question

Jim buys a 10-year bond with par value of 10,000 and 8% semi-annual coupons. The redemption value of the bond at the end of 10 years is 10,500. Calculate the purchase price to yield 6% convertible quarterly.a. 11,700.b. 14,100.c. 14,600.d. 15,400.e. 17,700.

Answer 1

a. 11,700

Step-by-step explanation:

The purchase price of the Bond is its Present Value or PV. The fact the Bond is convertible quarterly does not affect the normal calculations of this Present Value.

Calculation of Bond Purchase Price

N = 10 × 2 = 20

FV = 10,500

PMT = ($10,000 × 8%) ÷ 2 = $400

I = 6 %

P/YR = 2

PV = ?

Using a financial calculator to input the values as shown above the PV would be $11,765

The purchase price is thus closest to $11,700