1 12 pts What is the maximum price you will pay for a bond w

1. (12 pts) What is the maximum price you will pay for a bond with a face value o 0 and a coupon rate of 12%, paid annually, if you want a yield to maturity of 5902) Assume that the bond will mature in 5 yea received in one year rs and the first payment will be

Solution

Value of Bond = Present value of all future cash flows

Value of Bond = Interest Payment + Principal Repayment

Bond Price = ($5000*12%)*((1-(1+5%)^(-5))/0.05)+($5000/(1.05^5))

Bond Price = $6515.3