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hodyreva
1 month ago
10

Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $4

0. If you require a 10 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
Business
1 answer:
Scilla [3.2K]1 month ago
5 0

Answer:

$828.36

Explanation:

The specifics indicate that

The principal amount = $1,000

Duration = 20 years; since interest payments occur semiannually, the effective duration = 20 \times \frac{12}{6} = 40 intervals.

Interest every six months = $40

The yearly interest rate is 10%, giving an effective rate of 5%

Future Value Interest rate = $40 \times (\frac{1}{(1+0.05)^1} +\frac{1}{(1+0.05)^2} +\frac{1}{(1+0.05)^3} +\frac{1}{(1+0.05)^4} +\frac{1}{(1+0.05)^5} +\frac{1}{(1+0.05)^6} +\frac{1}{(1+0.05)^7} +.................. + \frac{1}{(1+0.05)^4^0} )

= $40 \times 17.159 = $686.36

The Future Value of the Principal = $1,000 \times \frac{1}{(1 + 0.05)^4^0}

= $1,000 \times 0.142 = $142

Consequently, the current bond price is $686.36 + $142 = $828.36

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Response:

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Explanation:

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