Question

A semiannual coupon bond was issued 5 years ago today with a maturity of 20 years. Its coupon rate is 8% and par value $1,000. What is the current (today) bond price if the market interest is 6%?

a. $1,085.30

b. $1,000

c. $1,196

d. $1,231.15

Answer 1

.Information provided:

Face value= future value= $1,000

Time= 20 years - 5 years*2= 15 years*2= 30 semi-annual periods

Coupon rate= 8%/2= 4%

Coupon payment= 0.04*1,000= $40 per semi-annual period

Yield to maturity= 6%/2= 3% per semi-annual period

The current price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 40

I/Y= 3

N= 30

Press the CPT key and PV to compute the present value.

The value obtained is 1,196.

Therefore, the current price of the bond is $1,196.

Hence, the answer is option c.