Question

Your college roommate invested in a bond with a 7% annual coupon with a maturity of...

Your college roommate invested in a bond with a 7% annual coupon with a maturity of ten years. The bond has a par value of $1,000. The current market interest rate is 8.5%. How much did he/she pay for the bond?

b. $903.34

b. $889.52

c. $901.58

d. $945.02

e. $1,014.62
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Answer #1

Information provided:

Par value= future value= $1,000

Time= 10 years

Coupon rate= 7%

Coupon payment= 0.07*1,000= $70

Yield to maturity= 8.5%

The 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= 70

I/Y= 8.5

N= 10

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

The value obtained is 901.58.

Therefore, she paid $901.58 for the bond.

Hence, the answer is option c.

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