Question

A $100,000, 8% bond with interest payable quarterly is redeemable at 98(1/8) in 6 years. What is the purchase price to yield 9% compounded semi-annually?

A. $96,470.91

B. $98,704.19

C. $95,846.53

D. $94,470.19

E. $94,740.91

Answer 1

No of quarterly coupon payments pending till maturity (N) = 24 {6 years x 4}

Maturity value or Future Value (FV)= 100,000 x 98.125 = $ 98,125

Quarterly Coupon payment on bond (PMT) = $ 100,000 x 8% x 1/4 = $ 2,000

Yield to maturity on bond (Y) = [(1 + 9%/2)^(1/2) - 1] = 2.2252% per quarter.

Price of bond (PV) = ??

Using financial calculator or PV function in excel,

Price of bond (PV) = $ 94,740.91

Therefore, option E is correct.

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