Question

PRINTER VERSION BACK NEXT Problem 7.3 Knight, Inc., has issued a three-year bond that pays a coupon of 4.00 percent. Coupon payments are made semiannually. Given the market rate of interest of 3.50 percent, what is the market value of the bond? (Round answer to 2 decimal places, e.g. 15.25.) Market value

Answer 1

Answer:

Given

Annual Coupon Rate =4%

Semi annual Coupon rate C=4%/2=2%

Interest rate =3.5%

Semi annual interest rate r=3.5%=1.75%

Number of years =3 years

Number of semiannual N=3*2=6

Let Face Value of Bond F=100

Price of Bond P= C*F*(1-(1+r)^-N)/r + F/(1+r)^N

P=2%*100*(1-(1+1.75%)^-6)/1.75% + 100/(1+1.75%)^6 =$101.41