Final answer:
To calculate the current price of a bond, we can use the present value formula. This involves discounting the bond's future cash flows using the market interest rate. In this case, the bond has a 4% coupon rate, a par value of $1,000, and a maturity of 12 years. The market interest rate is 5.97%.
Step-by-step explanation:
A bond's price can be calculated using the present value formula. In this case, we have a 12-year bond with a 4% coupon rate and a par value of $1,000. The interest rate for similar bonds is 5.97%. To find the current price, we need to calculate the present value of the bond's future cash flows. This can be done by discounting the bond's coupon payments and the final principal payment using the market interest rate. The formula to calculate the present value of a bond is:
PV = C/((1+r)^t) + C/((1+r)^(t-1)) + ... + C/((1+r)^2) + C/((1+r)^1) + F/((1+r)^t),
where:
PV = Present value of the bond,
C = Coupon payment per period,
r = Market interest rate per period,
t = Number of periods,
F = Face value of the bond.
Substituting the given values into the formula, we can calculate the current price of the bond.