Question

26. 5 years ago, you bought a Ford bond. At the time of the purchase, the...

26.

5 years ago, you bought a Ford bond. At the time of the purchase, the bond had a coupon rate of 8% paid semiannually, a par value of $1,000, and a time to maturity of 25 years. What is the expected price of the bond today if the interest rate is 12%?

Select one:

a. $701.65

b. $699.07

c. $697.43

d. 703.87

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Homework Answers

Answer #1

Market value of bond = Present value of remaining coupon payments + Present value of face value of bond

Maturity of bond = 25 years

Remaining life of bond = 25 – 5 = 20 years

Number of remaining semi-annual coupon payments = n = 20 years * 2 = 40

Semi-annual coupon payments = $1,000 * 8% * ½ = $40

Semi-annual market interest rate = r = 12%/2 = 6% = 0.06

Present value of annuity = Annuity amount*{1-(1+r)-n}/r

Present value of semi-annual coupon payments = $40*(1-1.06-40)/0.06 = $601.85

Present value of face value of bond = $1000/1.0640 = $97.22

Price of bond = $601.85 + $97.22 = $699.07

Correct answer is b. $699.07

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