Question
You are quickly approaching retirement and considering the financial wizard that you are, you think that interest rates will continue to be very low. You
You are quickly approaching retirement and considering the financial wizard that you are, you think that interest rates will continue to be very low. You currently have the opportunity to lock into some higher yield bonds and need to calculate how much you should pay for these bonds. These bonds are 20-year, noncallable bonds with an annual coupon rate of 9.5%. Each bond has a face value of $1,000 and it makes semiannual interest payments. If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for each bond? Explain your risk on the purchase of these bonds.
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