Question

# Consider a bond (with par value = \$1,000) paying a coupon rate of 7% per year...

 Consider a bond (with par value = \$1,000) paying a coupon rate of 7% per year semiannually when the market interest rate is only 6% per half-year. The bond has 3 years until maturity.

 a. Find the bond's price today and 6 months from now after the next coupon is paid. (Round your answers to 2 decimal places. Omit the "\$" sign in your response.)

 Current price ____________ \$ Price after six months __________ \$

 b. What is the total (6-month) rate of return on the bond? (Omit the "%" sign in your response.)

 Rate of return _____________ %

Current Price:

Par Value = \$1,000

Annual Coupon Rate = 7%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50%*\$1,000 = \$35

Semiannual Interest Rate = 6%

Time to Maturity = 3 years
Semiannual Period to Maturity = 6

Price of Bond = \$35 * PVIFA(6%, 6) + \$1,000 * PVIF(6%, 6)
Price of Bond = \$35 * (1 - (1/1.06)^6) / 0.06 + \$1,000 / 1.06^6
Price of Bond = \$877.07

Price after six months:

Par Value = \$1,000
Semiannual Coupon = \$35
Semiannual Interest Rate = 6%
Semiannual Period to Maturity = 5

Price of Bond = \$35 * PVIFA(6%, 5) + \$1,000 * PVIF(6%, 5)
Price of Bond = \$35 * (1 - (1/1.06)^5) / 0.06 + \$1,000 / 1.06^5
Price of Bond = \$894.69

Rate of Return = (\$894.69 + \$35 - \$877.07) / \$877.07
Rate of Return = 6.00%

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