You are reviewing a $1,000 par value bond that pays 6.8% semi-annual coupon interest, and has 10 years before it matures.

1a. You (and other investors) currently require a nominal annual rate of 7.5 percent for this bond. In other words, the comparable bonds have a YTM of 7.5%. How much should you be willing to pay for this bond today?\

1b. If you buy this bond today and hold it for 5 years. You are planning to sell it in the secondary market at the end of 5 years. Assume you expect the market to require a nominal rate of only 6.3 percent when you sell the bond (in 5 years) due to a general decline in interest rates. This is due to the company performed well during this 5 years and its riskiness for debt is reduced.

How much should you be willing to charge for this bond 5 years from today? Note: Since you will be selling this bond in 5 years in the secondary market to another investor, you are not holding the bond to its maturity date in 10 years. Assume there is no transaction cost.

Do with Financial Calculator with how to steps