The Company is issuing 10,000 bonds, each with a face value of $975, a stated rate of 8

Finance Nov 13, 2020

The Company is issuing 10,000 bonds, each with a face value of $975, a stated rate of 8.5%, and a 20-year term. When the bonds are issued, the market rate is 7.1%.

What is the maximum price an investor will pay for a single bond?

Expert Solution

Here, coupon frequency is not provided

Case 1: Coupon frequency is annual
Price=975*8.5%/7.1%*(1-1/1.071^20)+975/1.071^20=1118.49

Case 2: Coupon frequency is semiannual
Price=975*8.5%/7.1%*(1-1/(1+7.1%/2)^(2*20))+975/(1+7.1%/2)^(2*20)=1119.62

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