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A business issues a $1,000 par, 10-year 7% coupon bond. The bond makes SEMIANNUAL coupon payments. If the required return on the bond is 10%, what is the bond’s price?

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Answer: $741.47

Explanation:

The price of a bond can be calculated using the following formula:

Price = (C / (1 + r/n)) * (1 - (1 / (1 + r/n)^(nt))) + (F / (1 + r/n)^(nt))

Where:

C is the coupon payment

r is the required return on the bond

n is the number of times the bond makes coupon payments per year

t is the number of years to maturity

F is the face value of the bond

In this case, the bond has a par value of $1,000 and makes SEMIANNUAL coupon payments, which means it makes payments twice per year. The required return on the bond is 10% and the bond has a 10-year maturity, so t = 10. The coupon payment can be calculated using the following formula:

C = (r * F) / n

Plugging in the values, we get:

C = (0.07 * 1000) / 2 = $35

Plugging these values into the formula for the price of a bond, we get:

Price = ($35 / (1 + 0.1/2)) * (1 - (1 / (1 + 0.1/2)^(210))) + ($1000 / (1 + 0.1/2)^(210))

Solving this equation, we get:

Price = $741.47

Therefore, the price of the bond is $741.47.

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