You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months. If your simple annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond?

$1,124.62

Explanation:

With interest payment every 6 months and semi-annual compounding, the number of periods of interest payment in 10 years = 20 periods.

The price to be paid for the bond will be computed by finding the present value of the interest payment (using the annuity formula) and the present value of the repayment of the face value of the bond at the end of 10 years.

where A = the periodic interest payment = $60

r = is the periodic (not annual) rate of return = 10%/2 = 5%

n = total number of periods = 20

F = the face value of the bond = $1,000.

= 747.73 + 376.89

= $1,124.62

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