Question

6. Matt purchases a 20-year par value bond with 8% semiannual coupons at a price of 1772.25. The bond can be called at par value X on any coupon date starting at the end of year 15. The price guarantees that Matt will receive a nominal semiannual yield of at least 6%. Bert purchases a 20-year par value bond identical to the one purchased by Matt, except that it is not callable. Assuming a nominal semiannual yield of 6%, the cost of the bond purchased by Bert is P. Calculate P.

Answer 1

$699.07

Step-by-step explanation:

For computing the cost of the bond purchased we used the present value formula i.e to be shown in the attachment below:

Given that,

Assuming figure Future value = $1,000

Rate of interest = 6%

NPER = 20 years × 2 = 40 years

PMT = $1,000 × 8% ÷ 2 = $40

The formula is shown below:

= -PV(Rate;NPER;PMT;FV;type)

So, after applying the above formula, the bond purchased amount is $699.07