Question

A $5,000 bond that pays monthly coupons at j₁₂ = 6% was purchased on June 15, 2020 at a price (P) to yield j₂ = 4.85%. The bond is redeemable at par on December 15, 2025.

Calculate P, the bond purchase price. Answers rounded to the nearest dollar.

• A.

  $5,277

• B.

  $5,000

• C.

  $5,286

• D.

  $5,289

Answer 1

Price = PV of CFs from it.

Effective yield = (1+r)^n - 1

0.02425 = ( 1 + r)^6 - 1

(1+r)^6 = 1.02425

1+r = 1.02425^(1/6)

= 1.004001

r = 1.004001 - 1

= 0.004001 i.e 0.4001%

Month	CF	PVF @0.7925%	Disc CF
1-66	$      25.00	$   57.90	$ 1,447.59
66	$ 5,000.00	$      0.77	$ 3,841.64
Bond price	$5,289.23

OPtion D is correct.

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