Question

In: Finance

A $1,000 bond with a coupon rate of 5% paid semi-annually has 7 years to maturity...

A $1,000 bond with a coupon rate of 5% paid semi-annually has 7 years to maturity and a yield to maturity of 9%. The price of the bond is closest to $________. Input your answer without the $ sign and round your answer to two decimal places.

Solutions

Expert Solution

Information provided:

Par value= future value (FV)= $1,000

Time (N)= 7 years*2 = 14 semi-annual periods

Coupon rate= 5%/ 2= 2.5%

Coupon payment= 0.025*1,000= $25 per semi-annual period

Yield to maturity (I/Y)= 9%/2 = 4.50% per semi-annual period

The price of the bond is calculated to compute the present value.

The present value of the bond is calculated by entering the below in a financial calculator:

FV= 1,000

N= 14

PMT= 25

I/Y= 4.50

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

The value obtained is 795.54.

Therefore, the present value of the bond is $795.54.


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