Question

Rapid River, Inc. has a 7.5% coupon bond that matures in 9 years. The bond pays interest semi-annually. What is the market price of a $1,000 face value bond if the yield to maturity is 6.8%? Select one a $1,049.07 b. $1,046.55 c. $1,050.10 d $1,045.18

Answer 1

We shall find present value of bond

• discount factor = 0.034[6.8/2]/100 (semi annual payment so we will divide yearly rate by 2)
• present value = $??
• Future Value= $1,000
• Interest = [$1,000*7.5%/2]=$1,000*3.75%=$37.5 (semi annual payment so we will divide yearly rate by 2)

There will be 18 interest payments [9 years*2 times a year]

		PV factor at 3.4% for 18 years
Interest	$37.5	13.29969[1/1.034]^1+[1/1.034]^2+[1/1.034]^3.....1/1.034]^18	$498.735
Principle	$1,000	0.5478 [1/1.034]^18	$547.81
		Market price	$1,046.55

Answer B)

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