Question

The Sisyphean Company has a bond outstanding with a face value of $ 5 000 that reaches maturity in 8 years. The bond certificate indicates that the stated coupon rate for this bond is 8.5 ​% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 9.9 ​%, then the price that this bond trades for will be closest​ to: A. $ 6467 B. $ 5543 C. $ 3 695 D. $ 4619

Answer 1

Information provided:

Face value= future value= $5,000

Time= 8 years*2= 16 semi-annual periods

Coupon rate= 8.50%/2= 4.25%

Coupon payment= 0.0425*5,000= $212.50

Yield to maturity= 9.90%/2= 4.95%

The price of the bond is calculated by computing the present value of the bond.

The present value of the bond is computed with the help of a financial calculator.

Enter the below in a financial calculator to calculator to compute the present value of the bond:

FV= 1,000

N= 16

PMT= 212.50

I/Y= 4.95

Press the CPT key and PV to calculate the present value of the bond.

The value obtained is $4,619.32.

Therefore, the price of the bond is $4,619.32 and the answer is option d.