Question

1. Bradshaw Inc. is issuing 10-year bonds with a coupon rate of 6% and a face value of $1,000. If the coupon payments are paid semiannually and the return on bonds with similar risk is currently 8%, how much would you be willing to pay for one of these bonds?

Answer 1

We can use the bond price formula:

Where,
C = Periodic coupon payment,
P = Par value or face value of bond,
r = Current market interest rate
n = Years to maturity

When coupon payments are paid semi-annually:

C = 1000 * (6% / 2) = $30
r = 8% / 2 = 4% = 0.04
n = 10 * 2 = 20

Therefore,

Therefore, the bond price should be $864.10.