Question

Brian has a $500 bond with a 6.5% coupon. The yield of the bond is 6.8%. What is the bid price for the bond?

A) $468.00
B) $482.00
C) $478.00
D) $490.00

Answer 1

The bid price for the bond is $478.00.

Step-by-step explanation:

To calculate the bid price for the bond, we need to find the present value of its future cash flows. The bond has a 6.5% coupon rate, which means it pays $32.50 in interest each year ($500 * 6.5%). The remaining cash flow is the face value of the bond, which is $500. We can discount these cash flows by the yield of the bond, which is 6.8%.

Using the present value formula, we can calculate the bid price:

Bid Price = ($32.50 / 1.068) + ($32.50 / (1.068)^2) + ... + ($32.50 / (1.068)^n) + ($500 / (1.068)^n)

By solving this equation, we find that the bid price for the bond is approximately $478.00. Therefore, the correct answer is C) $478.00.