Question

Billy Bob, Inc. bonds have 10-years to maturity, a 7.5% coupon rate, but pays semiannually, and a par value of $1,000. The going rate of interest (YTM or r _d) is 4.5%, based on semiannual compounding. What is the bond's current price? (Answer in $s to the nearest cent xxxx.xx with no commas or $-sign needed.)

Answer 1

The question is solved with the help of a financial calculator.

Par value= future value= $1,000

Time= 10 years*2= 20 semi-annual periods

Coupon rate= 7.50%/2= 3.75%

Coupon payment= 0.0375*1,000= $37.50

Yield to maturity= 4.5%/2= 2.25%

The current price of the bond is calculated by entering the below in a financial calculator:

FV= 1,000; N= 20; PMT= 37.50; I/Y= 2.25

Press CPT and PV to calculate the current price of the bond.

The current price of the bond is 1239.46