Question

ABC has just issued a $1,000 par value bond that will mature in 10 years. This bond pays interest of $45 every six months. If the annual yield to maturity of this bond is 7%, what is the price of the ABC bond if the market is in equilibrium?

		$992
		$1,062
		$1,112
		none of above

Answer 1

The Price of the ABC Bond

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$45]	PMT	45
Market Interest Rate or Yield to maturity on the Bond [7.00% x ½]	1/Y	3.50
Maturity Period/Time to Maturity [10 Years x 2]	N	20
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,142.12.

The Price of the ABC Bond will be $1,142.12.

“Hence, the answer will be none of above”