Answer:
Price willing to pay=$1105.94
Explanation:
Annual Coupon Payment=$1,000*0.08
Annual Coupon Payment=$80
Calculating Present Value (PV) of Par Value:
[tex]PV=\frac{FV}{(1+i)^{20}}[/tex]
Where:
i is the rate of return.
FV is par value
[tex]PV=\frac{\$1000}{(1+0.07)^{20}}[/tex]
PV= $258.419.
Calculating PV of annual Coupon Payment:
[tex]PV=A\frac{1-(1+i)^{-20}}{i}[/tex]
i is the coupon rate
A is the annual Payment
[tex]PV=\$80\frac{1-(1+0.07)^{-20}}{0.07}[/tex]
PV=$847.521
Price willing to pay= Present Value (PV) of Par Value+ PV of annual Coupon Payment
Price willing to pay=$258.419+$847.521
Price willing to pay=$1105.94
