Question

Flobama Electric (FE) has an outstanding bond with a $1,000 face value and a 6% coupon rate of interest (paid seminanually). The bond, issue 12 years ago, matures in 18 years. If investors require a return equal to 5.6% to invest in similar bonds, what is the market value of FE's bond?

a. $1,044.64

b. $709.83

c. $1,045.00

d. $1,034.61

e. $956.34

Answer 1

price of coupon = Coupon payment per period * [1-(1+i)^-n]/i + par value/(1+i)^n

i = interest rate per period

n = number of periods

=>

Price = 60/2 * [1-(1+0.056/2)^-36]/(0.056/2) + 1000/(1+0.056/2)^36

= 1045

choose c)