Question

What is the price of a 30-year, 7% coupon rate, $1,000 face value bond that pays interest semi-annually, if the yield to maturity on similar bonds is 8%? a. $886.9 b. $940.7 c. $1,065.6 d. $1,138.4 e. $1,219.2

Answer 1

Given that;
Face value is $1,000
Coupon rate is 7%
As the interest is paid semiannually, the semiannual coupon rate is 7%/2=3.5%
Payment=(Semiannual coupon rate)*(Face value)=3.5%*1000=35
Time period is 30 years. As the interest is paid semiannually, the number of periods is 30*2=60
Yield to maturity is 8%, semiannual rate is 8%/2=4%

We can calculate the present value of the bond using excel as;

Answer: Hence, the present value is $886.9. So, option a is correct.