Question

What is the current price of a $1,000 par value, 8% coupon bond that pays interest semi-annually if the bond matures in 7 years and has a yield-to-maturity of 12%?

A.$814.1

B.$1,058.33

C.$817.45

D.$469.75

Answer #1

**The market value is computed as shown
below:**

**The coupon payment is computed as follows:**

= 8% / 2 x $ 1,000 (Since the payments are semi annually, hence divided by 2)

**= $ 40**

**The YTM will be as follows:**

= 12% / 2 (Since the payments are semi annually, hence divided by 2)

**= 6% or 0.06**

**N will be as follows:**

= 7 x 2 (Since the payments are semi annually, hence multiplied by 2)

**= 14**

**So, the price of the bond is computed as
follows:**

**Bonds Price = Coupon payment x [ [ (1 - 1 / (1 +
r)**^{n}**] / r ] + Par
value / (1 + r)**^{n}

= $ 40 x [ [ (1 - 1 / (1 + 0.06)^{14} ] / 0.06 ] + $
1,000 / 1.06^{14}

= $ 40 x 9.294983927 + $ 442.3009644

**= $ 814.10 Approximately**

**So, the correct answer is option A.**

Feel free to ask in case of any query relating to this question

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