Question

Finance Group offers 7.25 percent coupon bonds with semiannual
payments and a yield to maturity of 7.05 percent compounded
semiannually. The bonds mature in 11 years. What is the market
price per bond if the face value is $1,000? show the answer in
detail.

Answer #1

Coupon rate = 7.25%

Semi annual Coupon = C = Face Value * Coupon rate *1/2 = $1,000 * 7.25%/2 = $36.25

r = semi annual yeild to maturity = 7.05%/2 = 3.525%

n = 11*2 = 22 semi annual payments

Market Price of Bond = [C * [1 - (1+r)^-n] / r] + [Face Value / (1+r)^n]

= [$36.25 * [1 - (1+3.525%)^-22] / 3.525%] + [$1,000 / (1+3.525%)^22]

= [$36.25 * 0.533335528 / 0.03525] + [$1,000 / 2.14286722]

= $548.465614 + $466.664472

= $1,015.13009

Therefore, Market Price of bond is $1,015.13

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