Question

An n-year bond with par value $1,000 has annual coupons of $82. At a price of $891.62, the yield to the purchaser is 10% convertible semiannually. Find n.

	A.	8
	B.	12
	C.	20
	D.	10
	E.	7

Answer 1

We are given the yield here as 10%, therefore at 10% discount rate, the present value of the cash flows should be equal to the current price at 891.62. Therefore we have here:

We need to solve this using hit and trial method as:

For n = 7, we have here:

For n = 8, we have here:

For n = 10,

This is the closest to the required price ( Post this the price will decrease further)

Therefore n = 10 is the correct answer here.