Determining The Fair Value of A Coupon Bond
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You intend to purchase an 18-year, $1,000 face value bond that has coupon rate of 11% pays semiannually. If you expect to earn a 9.5 percent simple rate of return on this bond, how much should you be willing to pay for this bond immediately before it makes its first coupon payment?
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Solution Summary
This solution demonstrates how to determine the fair value of a coupon bond when the market interest rate differs from the coupon rate.
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A coupon bond pays periodic interest at the coupon rate and pays the face value at maturity. Because this bond pays 11 percent semi-annually, it pays 5.5 percent per compounding period (.11/2 periods per year=.055), over ...
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