Calculate: the maximum price you should be willing to pay for a bond *AND* how much should you be willing to pay for the bond?
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I have two problems and I am drawing a blank on how to work them. Please provide step by step calculations for each.
1. Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10 percent simple yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
2. A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your simple annual required rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for the bond?
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Solution Summary
The following posting helps with bond valuation problems. Step by step calculations are given.
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1. Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10 percent simple yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
Take the Present value of all ...
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