Question

Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 10.75%, based on semiannual compounding. What is the bond's price? Select the correct answer.
a. $734.2
b. $731.2
7 c. $728.31
d. $737.19
e. $740.15

Answer 1

The correct answer is option C : $728.31

The price of the bond is the present value of the expected future cash flows from the bond discounted a yield to maturity of 8%:

Present value of bond = Coupon/(1 + YTM) + Coupon/(1 + YTM)² + Coupon/(1 + YTM)³ + Coupon/(1 + YTM)⁴ + .....+ (Coupon + principle)/(1 + YTM)²⁰

Present value = 31.25/(1 + 0.05375) + 31.25/(1 + 0.05375)² + 31.25/(1 + 0.05375)³ + 31.25/(1 + 0.05375)⁴ + .....+ (31.25+1000)/(1 + 0.05375)²⁰ = $728.31.