Question

A 8.5% coupon bearing bond pays interest semi-annually and has a maturity of 6 years. If the annual yield to maturity is 5.6%, what is the current price of this bond? (Answer to the nearest penny, i.e. 999.99 but do not use a $ sign.)

Answer 1

Information provided:

Par value= future value= $1,000

Time= 6 years*2= 12 semi-annual periods

Coupon rate= 8.50%/2= 4.25%

Coupon payment= 0.0425*1000= $42.50

Yield to maturity= 5.6%/2= 2.80% per semi-annual period

The price of the bond is computed by calculating the present value of the bond.

The present value is computed by entering the below in a financial calculator:

FV= 1,000

N= 12

PMT= 42.50

I/Y= 2.80

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

The value obtained is 1,146.

Therefore, the current price of the bond is $1,146.

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