Acme Inc. just issued a bond with a $10,000 face value and a coupon rate of 7%. If the bond has a life of 30 years, pays semi−annual coupons, and the yield to maturity is 9%, what will the bond sell for?
Market value of bond = Present value of coupon payments + Present value of face value of bond
Maturity of bond = 30 years
Number of semi-annual coupon payments = n = 30 years * 2 = 60
Semi-annual coupon payments = $10,000*7%*1/2 = $350
Semi-annual effective interest rate = r = 9%/2 = 4.5% = 0.045
Present value of annuity = Annuity amount*{1-(1+r)-n}/r
Present value ofsemi- annual coupon payments = $350 * (1-1.045-60)/0.045 = $7,223.31
Present value of face value of bond = $10,000/1.04560 = $712.89
Price of bond = $7,223.31 + $712.89 = $7,936.20
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