Question

Otobo, Inc., has a bond outstanding with a coupon rate of 8.1 percent and semiannual payments. The yield to maturity is 5.0 percent and the bond matures in 10 years. What is the market price if the bond has a par value of $1000?

		1468.7
		1112.16
		1098.84
		1445.93
		1241.63

Answer 1

E.1,241.63.

price of the bond = [present value of annuity * interest amount] + [present value factor * par value]

here,

present value of annuity = [1-(1+r)^(-n)]/r

here,

r= 5% =>5%*6/12

=>2.5%=>0.025.

n = 10 years*2 semi annual period

=>20.

=>[1-(1.025)^(-20)]/0.025

=>15.589164

interest amount =$1000*8.1%*6 months / 12 months

=>$40.50.

present value factor = 1/(1+r)^n

=>1/(1.025)^20

=>0.61027094.

par value =$1000.

=>[15.589164*40.50]+[0.61027094*1000]

=>$1,241.63