Question

Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 10 percent and the interest is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 15 years to maturity. Compute the price of the bonds based on semiannual analysis. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

Given that-
Future value of bond =		1000
Coupon rate =		10%
Coupon amount =		50	semiannually
Number of year =		15	year
Number of period =15*2		30
YTM (annual) =		12%
Therefor semiannual YTM =
=(1+12%)^0.5-1		5.83%
We can use financial calculator to compute price of bond. Put in financial calculator below -
FV=		1000
PMT=		50
I=		5.83%
N=		30
Compute PV =		($883.64)
Hence, price of bond =		$ 883.64