Question

Ailerone, Inc. has issued a bond with the following characteristics:

Par Value	1,000
Settlement date	1/1/2000
Maturity date	1/1/2015
Annual coupon rate	11.00%
Coupons per year	2
Yield to maturity	12%

What is the price of the bond?

$931.18

$657.50

$30.00

$734.56

Answer 1

Par Value = $ 1000, Tenure = Maturity Date - Settlement Date = 1/1/2015 - 1/1/2000 = 15 years or 30 half-years, Annual Coupon Rate = 11 % payable semi-annually (twice a year) and Yield to Maturity = 12 % per annum or (12/2) = 6 per half-year.

Semi-Annual Coupon Paid = 0.5 x 0.11 x 1000 = $ 55

Therefore, Bond Price = Sum of Present Values of All Semi-Annual Coupon Payments + Par Value Redeemed at Maturity = 55 x (1/0.06) x [1-{1/(1.06)^(30)}] + 1000 / (1.06)^(30) = $ 931.1758 ~ $ 931.18

Hence, the correct option is (a)