Question

Clarington issued 15 year bonds in the amount of $500 000. Interest on the bonds is 2.2% payable annually. What is the issue price of the bonds, if the bonds are sold to yield 2.8% compounded quarterly?

A) $329 004
B) $132 950
C) $461 956
D) $330 425
E) $343 749

Answer 1

EAR = [(1 +stated rate/no. of compounding periods) ^no. of compounding periods - 1]* 100

Effective Annual Rate = ((1+2.8/4*100)^4-1)*100

Effective Annual Rate% = 2.83

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =15

Bond Price =∑ [(2.2*500000/100)/(1 + 2.8295/100)^k]     +   500000/(1 + 2.8295/100)^15

k=1

Bond Price = 461956