Question

You intend to purchase a 10 year ,10000 face value bond that pays interest of 800 every six months.If your norminal annual required rate of return is 10 percent with semi-annually compounding ,how much should you be willing to pay for this bond ? What's the current yield

Answer 1

Market price = $13,738.49

Step-by-step explanation:

The yield to maturity of the bond is 8% x 2 = 16%

You require a 10% return, so the present value of the bond should be:

PV of face value = $10,000 / (1 + 5%)²⁰ = $3,768.89

PV of coupon payments = $800 x 12.462 (PVIFA, 5%, 20 periods) = $9,969.60

Market price = $13,738.49