Question

MCA Healthcare issues a 5-year bond with an annual coupon of 4% and a face value of $100. What is the value of the bond if the yield to maturity is 4%?

Question 1 options:

1)

$116

2)

$120

3)

$96

4)

$108

5)

$84

6)

$88

7)

$92

8)

$112

9)

$104

10)

$100

Answer 1

When coupon rate is equal to yield to maturity, price will always be equal to 100. Here the coupon rate of 4% is equal to yield to maturity of 4%. Therefore, price is equal to 100

Price = $100

I will also as how you the calculation for understanding purpose but calculation is not necessary.

Coupon = 4% of 100 = 4

Price = Coupon * [1 - 1 / (1 + r)^n] / r + FV / (1 + r)^n

Price = 4 * [1 - 1 / (1 + 0.04)^5] / 0.04 + 100 / (1 + 0.04)^5

Price = 4 * [1 - 0.821927] / 0.04 + 82.192711

Price = 4 * 4.451822 + 82.192711

Price = $100