Question

2. You have a bond that matures in 20 years with a maturity value of $1,000. If the bond has an 8% semiannual coupon and the market requires a return of 7% on the bond, what is the current market price of the bond?

Answer 1

Par/Face value	1000
Annual Coupon rate	0.08
Annual coupon	80
semi-annual coupon	40
Present Value = Future value/[(1+(r/m))^mt]
r is the interest rate that is .07
t is the year
m is the compounding period that is 2
mt is the time period
current market price of the bond = sum of present values
r/2	0.035
mt	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26	27	28	29	30	31	32	33	34	35	36	37	38	39	40
future cash flow	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	40	1040
present value	38.65	37.34	36.08	34.86	33.68	32.54	31.44	30.38	29.35	28.36	27.40	26.47	25.58	24.71	23.88	23.07	22.29	21.53	20.81	20.10	19.42	18.77	18.13	17.52	16.93	16.35	15.80	15.27	14.75	14.25	13.77	13.30	12.85	12.42	12.00	11.59	11.20	10.82	10.46	262.68
current market price	1106.78
The current market price of the bond is equal to $1106.78