Question:
Imagine you are thinking about the purchase of a $1000 par value bond that pays interest of $70 each six months and has ten years to go before it matures. If you buy this bond, you expect to hold it for 5 years and then sell it in the market. You currently require a nominal annual rate of 16%, but you expect the market to require a nominal rate of only 12% when you sell the bond due to a general decline in interest rates. How much should you be willing to pay for the bond?