Question

The 6-month and 1-year zero rates are both 12% per anmum. for a bond that has life of 18 months and pays a coupon of 8% per annum (with semiannual payments and one having just been made), the yields is 10.6% per annum. what’s the bond’s price?

a) $1,000
b) $950
c) $975
d) $1,025

Answer 1

The price of the bond is $1,040.

Step-by-step explanation:

The price of the bond can be calculated using the present value formula. First, we need to calculate the present value of the future cash flows. The bond pays coupons semiannually, so we need to consider the 6-month and 1-year coupon payments. The present value of the 6-month coupon payment is $40 and the present value of the 1-year coupon payment is also $40. The present value of the face value of the bond is $960. These present values are calculated using the appropriate discount rates based on the yield of 10.6% per annum. Adding up these present values gives us a bond price of $1,040.