Question

You have just purchased a municipal bond with a $10,000 par value for $9,500. You purchased it immediately after the previous owner received a semiannual interest payment. The bond rate is 6.6% per year payable semiannually. You plan to hold the bond for 7 years, selling the bond immediately after you receive the interest payment. If your desired nominal yield is 10% per year compounded semiannually, what will be your minimum selling price for the bond

Answer 1

$12,341.80

Step-by-step explanation:

The computation of the minimum selling price for the bond is shown below:

Semi-annual = 10% ÷ 2 = 5%

Semi-annual compounding periods = 7 × 2 = 14

Semi-annual coupon (for 10 bonds) = $10,000 × 6.6% × (1 ÷ 2) = $330

as we know that

Here We assume the selling price be S

The Present worth of the bond = PW of future cash flows

$9,500 = $330 × P/A(5%, 14) + S × P/F(5%, 14)

$9,500 = $330 × 9.898641 + S × 0.505068

$9,500 = $3,266.55 + S × 0.505068

S × 0.505068 = $6,233.45

= $12,341.80