Question

A bond with face value $1,000 has a current yield of 6.5% and a coupon rate of 8.5%. a. If interest is paid annually, what is the bond's price? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Bond price

Answer 1

The price of a bond with a face value of $1,000, a current yield of 6.5%, and a coupon rate of 8.5% is $1307.69 when rounded to two decimal places.

Step-by-step explanation:

To calculate the price of the bond with a face value of $1,000, a current yield of 6.5%, and a coupon rate of 8.5%, we use the formula:

Price = Coupon Payment / Current Yield

Where the Coupon Payment is the annual interest payment, calculated as the face value multiplied by the coupon rate. In this case:

Coupon Payment = $1,000 × 8.5% = $85

Using the given current yield of 6.5%, the bond's price would be:

Price = $85 / 6.5% = $85 / 0.065 $≈$ 1307.69

Rounded to two decimal places, the bond's price would be $1307.69.