A municipality needs funding for upcoming infrastructure (water
and sewer line) repair or replacement. They issue a series of
$1,000, 5% semiannual, 10-year bonds. The bonds are initially sold
at a discount for $975.
You want to buy one of these bonds from a friend who has held
the bond for 2 full years, receiving 4 semiannual payments. You
plan to keep the bond to maturity and want to earn 8% semiannual on
the investment. What is the most you should pay for it?