Jane Smith, MD, has had a great year in her pediatrics practice, and she has cash that she wants to invest. Her financial adviser suggests she buy a seven-year, $1,500 par value bond with an annual coupon rate of 10 percent and three years remaining to maturity. Dr. Smith decides to explore her options. She discovers that new, similarly risky bonds have an average annual rate of return of 12 percent.

Bank certificates of deposit are returning 5 percent annually on average while a mutual fund investing in high-risk growth stocks has an average annual rate of return of 20 percent. If Dr. Smith follows her financial adviser’s advice, what is the maximum amount she should pay for the bond? Explain your answer.