Estimating price of a coupon paying 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%, interest payments are made annually, and the bond matures in 20 years. If your required pretax rate of return is 14%.
a. What is the maximum price you would be wiling to pay for a 20-year, 10.5% bond?
b. Assume the bond pays interest annually. Would you purchase the bond if its current market price is $750?
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Solution Summary
Solution describes the steps for calculating price estimate of a coupon paying bond.
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Solution:
a. What is the maximum price you would be wiling to pay for a 20-year, 10.5% bond?
The Fair price of a bond can be found as under:
Value of bond = Present value of annual coupon ...
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- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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