Question

# What is the current price of a \$1,000 par value, 8% coupon bond that pays interest...

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

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 / 1.0614

= \$ 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