Question

Suppose that a 25-year government bond has a maturity value of $1000 and a coupon rate of 3%, with coupons paid semiannually. Find the market price of the bond if the yield rate is 2% compounded semiannually. (Round your answer to the nearest cent.)

Answer #1

**The value of the bond is computed as shown
below:**

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

= 3% / 2 x $ 1,000 (Since the payments are semi annually, hence divided by 2)

**= $ 15**

**The YTM will be as follows:**

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

**= 1% or 0.01**

**N will be as follows:**

= 25 x 2 (Since the payments are semi annually, hence multiplied by 2)

**= 50**

**So, the price of the bond will be as
follows:**

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

= $ 15 x [ [ (1 - 1 / (1 + 0.01)50 ] / 0.01 ] + $ 1,000 / 1.0150

= $ 15 x 39.19611753 + $ 608.0388247

**= $ 1,195.98 Approximately**

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$
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