In: Finance
Compute the semi-annual yield, using the equation as shown below:
Semi-annual yield = Annual yield/ 2
= 7%/ 2
= 3.5%
Hence, the semi-annual yield is 3.5%.
Compute the PVIFA at 3.5% and 40 half years, using the equation as shown below:
PVIFA = {1 – (1 + Rate)-Number of periods}/ Rate
= {1 – (1 + 0.035)-40}/ 3.5%
= 21.3550723334
Hence, the PVIFA at 3.5% and 40 half years are 21.3550723334.
Compute the PVIF at 3.5% and 40 half years, using the equation as shown below:
PVIF = 1/ (1 + Rate)Number of periods
= 1/ (1 + 0.035)40
= 1/ 3.95925972087
= 0.25257246821
Hence, the PVIF at 3.5% and 40 half years are 0.25257246821.
Compute the semi-annual interest, using the equation as shown below:
Semi-annual interest = Face value*Coupon rate/2
= $1,000*9%/2
= $45
Hence, the semi-annual interest is $45.
Compute the current bond price, using the equation as shown below:
Bond price = (Interest*PVIFA3.5%, 40) + (Face value*PVIF3.5%, 40)
= ($45*21.3550723334) + ($1,000*0.25257246821)
= $960.978255003 + $252.57246821
= $1,213.55072321
Hence, the price of bond is $1,213.55072321.