Final answer:
To calculate the maximum price for the IBM bond, you need to find the present value of its future cash flows. By using the present value formula for an annuity, you can determine the present value of the interest payments. The maximum price to pay for the bond is the sum of the present values of the interest payments and face value.
Step-by-step explanation:
To calculate the maximum price you should be willing to pay for the IBM bond, you need to determine the present value of the bond's future cash flows. In this case, the bond pays semiannual interest, so you will have 24 periods (2 periods per year for 12 years). The coupon rate is 6.75%, which means you will receive $33.75 ($1,000 * 0.0675 / 2) every six months. The required rate of return is 9.4%, which corresponds to a semiannual discount rate of 4.7%.
Using the present value formula for an annuity, you can calculate the present value of the interest payments:
PV = (33.75 / 0.047) * (1 - (1 + 0.047)^-24) = $678.69
The present value of the face value ($1,000) is simply $1,000. Therefore, the maximum price you should be willing to pay for the IBM bond is the sum of the present values of the interest payments and face value: $678.69 + $1,000 = $1,678.69.