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Solution:
𝑟 .09
V = 3,200 m= 4 b = = = 0.0225 j =8%
𝑚 4
𝑗 .08
r = 9% i= = = 0.02 t = 4 years n= tm = 4(4) =16
𝑚 4
k = Fb = 3,200(.0225) = 72
1 −( 1+𝑖)−𝑛
−𝑛
P = V( 1 + 𝑖 ) + k
𝑖
1 −( 1+0.02)−16
−16
= 3200 (1 + 0.02) + 72
0.02
= 3200(0.7284458137) + 72(13.57770931)
= 2331.026604 + 977.5950706
= 3,308.62 – price of the bond
At 110% redemption means
V = 3200(1.10) = 3,520
−𝑛 1 −( 1+𝑖)−𝑛
P = V( 1 + 𝑖 ) + k
𝑖
= 3,520(0.7284458137) + 72(13.57770931)
= 3, 541.72 –price of the bond