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    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:

    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 ...

    Solution Summary

    Solution describes the steps for calculating price estimate of a coupon paying bond.

    $2.19

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