J.T. Is considering purchasing a $1,000 face value bond with a maturity period o
ID: 1157877 • Letter: J
Question
J.T. Is considering purchasing a $1,000 face value bond with a maturity period of 5 years. The bond pays 5%; however, coupons are paid semi-annually. If J.T. requires a return of 8%, compounded semi-annually, the most he should pay for the bind is closest to
2 J. T is considering purchasing a $1,000 face value bond with a maturity period of 5 years. The bond pays 5%; however, coupons should pay for the bond is closest to... are paid semi-annually. IfJ.T requires a return of 8%, compounded semi-annually, the mnost he a) $879 b) $1,082 c) $1,203 d) $631 e) $799 f $780 g) $598 h) $715Explanation / Answer
ANSWER:
We need to find the present value.
given future value = $1,000
n = 5 years or 10 semi annual years
i = 8% per year or 8% / 2 = 4% semi annually
interest amount to be recieved = 5% / 2 = 2.5% * 1,000 = $25 ( coupons paid semi annually)
in excel we will use the =-pv formula
=-pv(rate,nper,pmt,fv,type)
=-pv(4%,10,25,1000,0)
= $878.34
so the amount that he could pay the most is $879 , that is option a.
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