Question

A 9 percent, 7-year, semiannual coupon bond has a face value of $1,000. What is the current price of this bond if the market rate of return is 8.8 percent?

$1,010.29

$1,011.49

$1,112.32

$1,111.24

Answer 1

	CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY
	Step 1 : Calculation of Annual Coupon Payments
	Par value of the bond issued is   =			$1,000
	Annual Coupon %			9.00%
	Annual Coupon Amount			$90.00
	Semi Annual Coupon Amount			$45.00
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 7 years
	Interest is paid semi annyally so total period = 7 * 2 = 14 Years
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 8.8%
	Bonds interest is paid semi annualy means so discounting factor = 8.8 % /2= 4.4 %
	PVF = 1 / Discount rate = 1/ 1.044
	Result of above will again divide by 1.04 , repeat this lat period
	Period	Interest	Amount	PVF @ 4.4%	PresentValue
	1	Interest	$45.00	0.9579	$43.10
	2	Interest	$45.00	0.9175	$41.29
	3	Interest	$45.00	0.8788	$39.55
	4	Interest	$45.00	0.8418	$37.88
	5	Interest	$45.00	0.8063	$36.28
	6	Interest	$45.00	0.7723	$34.75
	7	Interest	$45.00	0.7398	$33.29
	8	Interest	$45.00	0.7086	$31.89
	9	Interest	$45.00	0.6787	$30.54
	10	Interest	$45.00	0.6501	$29.26
	11	Interest	$45.00	0.6227	$28.02
	12	Interest	$45.00	0.5965	$26.84
	13	Interest	$45.00	0.5713	$25.71
	14	Interest	$45.00	0.5473	$24.63
	14	Bond Value	$1,000.00	0.5473	$547.26
		Total			$1,010.29
		Current Bonds Price =			$1,010.29
	Answer = Option A =		$1,010.29