Sam is considering investing in a bond with a face value of $20,000. The bond pays an interest of 4% payable quarterly. If he expects to make a 1 ½ % return per quarter on this investment with a maturity of 20 years, determine the most he can pay for the bond . a. $18,102.65 b. $14,923.86 c. $15,355.40 d. $16,000

$43,204

Explanation:

Price of the bond is the present value of all cash flows of the bond. These cash flows include the coupon payment and the maturity payment of the bond. Both of these cash flows discounted and added to calculate the value of the bond.

According to given data

Face value of the bond is $20,000

Coupon payment = C = $20,000 x 4% = $800 Quarterly

Number of periods = n = 20 years x 4 = 80 periods

Market Rate = 1 ½ % quarterly = 1.5% quarterly

Price of the bond is calculated by following formula:

Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]

Price of the Bond = 800 x [ ( 1 - ( 1 + 1.5% )^-80 ) / 1.5% ] + [ $20,000 / ( 1 + 1.5% )^80 ]

Price of the Bond = $37,125.86 + $6,077.8 = $43,203.66 = $43,204

you had the wrong answer

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