Answer:
fair value is $761
Explanation:
Given data
bond value = $1000
rater r = 12 %
rate R = 16%
time = 20 year
to find out
a fair price
solution
we know compounding period in year is = 4
so time 20 x 4 = 80
fair Price = [tex]\sum_{k=1}^{k=80}[/tex] [(Quarterly Coupon) / (1 + R/400)^t] +bond value / (1 + R /400)^t
here
Quarterly Coupon = 12 × 1000/400 = 30
so
fair Price = [tex]\sum_{k=1}^{k=80}[/tex] [(30) / (1 + 16/400)^k] + 1000 / (1+16/400)^80
solve it we get
fair value is $761
