Reference no: EM131197903
Suppose that your company wants to sell bonds in order to finance an expansion, and that investors would like to earn an effective annual rate of 10 percent on these bonds. On January 1, 2017 what is the highest price that investors would be willing to pay for a bond with the following characteristics?
Face Value: $1,000
Maturity Date: December 31, 2022
Coupon Rate: 6% per year
Assume that the bond principal (i.e., face value) is paid on the maturity date and the coupon (i.e., interest payments are made on December 31 each year.
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It will be helpful to draw a cash flow diagram, or other relevant figure, to guide my thinking.
For questions that ask for an answer involving words please respond in complete and concise sentences.
Please state explicitly any assumptions that you think you need to solve a problem.
Unless specified otherwise, all interest rates in this problem are compound interest rates.
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