Answer:
$928.71
Explanation:
The maximum amount that the Pierre should pay for the bond is equal to present value of all the cash flows associated with this bond over a life of 5 years of bond.
Assuming that the par value of the bond is $1,000, the coupon rate payment associated with this bond is, 5.5%*1,000=$55 per year for 5 years and the bond will mature at its par value of $1,000 at the end of its 5th year.
Year Cash Flows Present value@7.25%
1-5 $55 $224
5 $1,000 $704.71
Maximum amount that Pierre should pay $928.71
