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%?
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:
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.
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