Question

Marshalls Corporation has a bond currently outstanding. The bond has a face value of $1,000 and matures in 10 years. The bond makes no coupon payments for the first three years, then pays $25 every six months over the subsequent four years, and finally pays $85 every six months over the last three years. If the required return on these bonds is 5.5 percent compounded semiannually, what is the current price of the bond?

		$986.33
		$997.88
		$1,049.55
		$1,027.68
		$1,009.82

Answer 1

Price of the bond is itspresent value of future cash flow
here payment is made semiannually hence we we should required return by 2
required reurn = 5.5% /2 =2.75%
Calculating present value
Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.0275^a	d=b*c
7	$                 25	0.827041	$                   20.68
8	$                 25	0.804906	$                   20.12
9	$                 25	0.783364	$                   19.58
10	$                 25	0.762398	$                   19.06
11	$                 25	0.741993	$                   18.55
12	$                 25	0.722134	$                   18.05
13	$                 25	0.702807	$                   17.57
14	$                 25	0.683997	$                   17.10
15	$                 85	0.665691	$                   56.58
16	$                 85	0.647874	$                   55.07
17	$                 85	0.630535	$                   53.60
18	$                 85	0.613659	$                   52.16
19	$                 85	0.597235	$                   50.76
20	$                 85	0.581251	$                   49.41
20	$           1,000	0.581251	$                 581.25
	Bond Price		$             1,049.55

Correct Option: THIRD