Question

Your friend barbara has a bond that she would like to sell to you. the bond matures in 10 years, has a face value of $1,000 and a coupon interest rate of 6% (paid annually). if you know that the yield to maturity on similar bonds is 8%, what is the maximum price you would be willing to pay for the bond?

Answer 1

Given, the current market rate of 8% for a similar bond, a bond with a face value of $1000.00 and paying a coupon rate of 6% annually. The maximum price I should be willing to pay is ($865 selling at a discount)

Variables:
C=coupon payment $60
n=number of years 10
i= market rate or required yield = 8%
k= number of coupon payments in 1 yr = 1
P=value at maturity or par value= 1000