Final answer:
The market price of the bond with a coupon rate of 7% and a current yield of 7.995% is calculated by dividing the annual coupon payment by the current yield percentage. This equates to approximately $875.54, which rounds to $876 when rounded to the nearest dollar.
Step-by-step explanation:
The question is related to finding the market price of a $1,000 par value, 12-year annual bond with a coupon rate of 7% when the current yield is 7.995%. To find the market price, you need to calculate the price at which the bond's yield to maturity (YTM) would be equal to the current yield.
The coupon payment every year would be (7% of $1,000) = $70. Since the current yield is given as 7.995%, the bond should provide an annual return of 7.995% of its market price.
Setting up the equation, we have Market Price * 7.995% = $70.
Solving for the Market Price gives: Market Price = $70 / 0.07995, which calculates to approximately $875.54. Since the options are given in whole dollars, the market price to the nearest dollar is $876.