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Suppose you consider buying a bond promising to pay you $25 one year from now and then the same amount every year through the fifth year (that is, you should receive a total of five coupon payments)
Suppose you consider buying a bond promising to pay you $25 one year from now and then the same amount every year through the fifth year (that is, you should receive a total of five coupon payments). At the time you receive your fifth payment, you will also receive the bond's face value of $3,000. Suppose the interest rate for a riskless bond is 5%. The most you would be willing to pay for this bond is $ Give your answer to two decimals.
Expert Solution
Ans. The maximum price for the bond the person will be willing to pay is the present worth of the cashflow at 5% interest rate,
PW = 25/(1+0.05) + 25/(1+0.05)^2 + 25/(1+0.05)^3 + 25/(1+0.05)^4 + (3000+25)/(1+0.05)^5
=> PW = $2458.82
Thus, the maximimum willingness to pay for the bond = $2458.82
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