Final answer:
Using the present value of annuity and present value formulas with inputs like the coupon rate, par value, and YTM, one can calculate the current bond price, which considers the time value of money and semiannual coupon payments.
Step-by-step explanation:
To calculate the current price of a bond when knowing its coupon rate, par value, and yield to maturity (YTM), we can use the present value of an annuity formula for the coupon payments and the present value formula for the principal payment. Given that Westco Company's bonds have a coupon rate of 6.9 percent, a par value of $1,000, and a current YTM of 5.5 percent, and that they make semiannual payments, the remaining period is 13 years (or 26 semiannual periods) since they were issued one year back from now. Using these inputs, the current bond price can be calculated.
To calculate the semiannual coupon payment, we use the formula: Coupon Payment = (Coupon Rate × Par Value) ÷ 2, which comes out to ($1,000 × 6.9%) ÷ 2 = $34.50 per semiannual period.
To find the present value of the semiannual coupon payments, we use the formula: Present Value of Annuity = Coupon Payment × [(1 - (1 + YTM/2)^{-number of periods}) ÷ (YTM/2)], and the present value of the par value is calculated using: Present Value = Par Value ÷ (1 + YTM/2)^{-number of periods}. Summing these two present values provides the current bond price.
After performing all the calculations with the given YTM of 5.5 percent (2.75 percent per semiannual period) and 26 periods, we get the current bond price, which should be rounded to two decimal places as per the instruction.