Problem 7-16 Bond valuation You are considering a 15-year, $1,000 par value bond
ID: 2777346 • Letter: P
Question
Problem 7-16
Bond valuation
You are considering a 15-year, $1,000 par value bond. Its coupon rate is 10%, and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 8.92%, how much should you be willing to pay for the bond? Do not round intermediate steps. Round your answer to the nearest cent.
Problem 7-16
Bond valuation
You are considering a 15-year, $1,000 par value bond. Its coupon rate is 10%, and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 8.92%, how much should you be willing to pay for the bond? Do not round intermediate steps. Round your answer to the nearest cent.
Explanation / Answer
price = C * [1-(1+i)^-n]/i + 1000/(1+i)^n
where
C = coupon amount per period
i= interest rate per period
n=number of periods
price = 100 * [1-(1+8.92%)^-15]/8.92% + 1000/(1+8.92%)^15
= 1087.47