Question

A company issued $1,000 par value bond at 6% coupon rate. The bond will mature in 6 years. Current market yield for this bond is 7%. If the coupon is paid semi-annually, what would be the value of this bond?

Group of answer choices

$951.68

$682.29

$973.36

$952.33

Answer 1

The present value of a bond is calculated by discounting the bond's future cash inflows by the current market interest rate. In other words, the present value of a bond is the total of: present value of the semiannual interest payments plus present value of the principal payment on the date the bond matures.

During Year 0.5 to 6. we will receive interest on this bond. Semiannual Interest will be calculated as Face Value * Coupon Rate * 0.5, which is 1000*6%*0.5 = $30.

Further. at end of 6th year, we will receive our principal back, i.e., $1000.

We will discount all these cash flows with current market yeild. We have been given market yeild in per annum, while our cash flows in semi-annual. Hence, we need to find market yeild for 6 months, which is 3.5%.

Discount yield for each year will be calculated as , wherein n is Time Period.

Calculation of the same is shown below -

Time Period	Particulars	Cash Inflow Amount	Semi-annual Discounted Yeild @ 3.5%	Discounted Cash Flow
0.5	Interest	30	0.9662	28.99
1	Interest	30	0.9335	28.01
1.5	Interest	30	0.9019	27.06
2	Interest	30	0.8714	26.14
2.5	Interest	30	0.8420	25.26
3	Interest	30	0.8135	24.41
3.5	Interest	30	0.7860	23.58
4	Interest	30	0.7594	22.78
4.5	Interest	30	0.7337	22.01
5	Interest	30	0.7089	21.27
5.5	Interest	30	0.6849	20.55
6	Interest	30	0.6618	19.85
6	Principal	1000	0.6618	661.78
			Total	951.68

Hence, Price of Bond is $951.68 (Option A)