Question

An investor purchases a 10-year , $1,000 par value bond that pays semiannual interest of $45. If the semiannual market rate of interest is 6%, what is the current market value of the bond? (FV of $1. PV of $1. FVA of $1. PVA of $1. FVAD of $1 and PVAD of $1 (Use appropriate factor(s) from the tables provided.) Multiple Choice $828 $878 $1,000 О O $1,516

Answer 1

Correct answer------------$828

Working

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

.

	Annual Rate	Applicable rate		Face Value	$ 1,000
Market Rate	12.00%	6.00%		Term (in years)	10
Coupon Rate	9.00%	4.50%		Total no. of interest payments	20

.

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$      1,000	at	6.00%	Interest rate for	20	term payments
PV of $1	0.31180
PV of	$      1,000	=	$ 1,000	x	0.31180	=	$ 312	A
Interest payable per term	at	4.50%	on	$ 1,000
Interest payable per term	$ 45
PVAF of 1$	for	6.00%	Interest rate for	20	term payments
PVAF of 1$	11.46992
PV of Interest payments	=	$ 45	x	11.46992	=		$ 516	B
				Bond Value (A+B)			$ 828