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    Estimating price of a bond

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    You are considering purchasing a bond at the end of this year. The bond has a coupon rate of 10.5 percent, interest payments are made annually, and the bond matures in 20 years. If your required pretax rate of return is 14 percent, what is the maximum price you would be willing to pay for a 20-year, 10.5 percent bond? Assume the bond pays interest annually. Would you purchase the bond if its current market price is $750?

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    Solution:

    The Fair value of a bond is given by
    Value of bong = Present value of annual coupon payments + Present value of Principal ...

    Solution Summary

    Solution describes the steps for estimating fair value of a coupon paying bond.

    $2.19

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