Question

A bond that compounds semiannually has a Face Value of $1,000

Answer 1

The value of a bond is influenced by interest rates, and its price is adjusted accordingly to make it more attractive to investors. Using a discount rate, one can calculate the present value of a bond based on future payments. Interest rate rises lead to a drop in the present value of the bond.

Step-by-step explanation:

The value of a bond fluctuates according to the interest rates in the economy. A bond issued at a certain interest rate becomes less attractive if new bonds are issued at higher rates. To make the bond more appealing, sellers may reduce its price. For instance, if Ford Motor Company issues a five year bond with a face value of $5,000 that pays an annual coupon payment of $150, the interest yield is effectively 3%. However, if the market interest rates rise to 12%, the bond's price would likely decrease to attract buyers who can get a 12% yield elsewhere.

Looking at a two-year bond issued for $3,000 at an 8% interest rate, the bond will pay $240 in interest each year. To understand the present value of this bond, a discount rate is applied to its future payments. If the discount rate is the same as the coupon rate (8%), the present value of the bond would be equal to its face value. But if interest rates rise to 11%, the present value calculation will show the bond is worth less than its face value because future payments are discounted more steeply.

Answer 2

The market price of the bond with a Face Value of $1,000, maturity of 15 years, coupon rate of 5%, and yield to maturity of 6.42% is $921.25 (Option A).

Step-by-step explanation:

In order to calculate the market price of a bond, we need to use the formula for present value of a bond. The formula is:

Market Price = (Coupon Payment / (1 + Yield to Maturity)ⁿ) + (Face Value / (1 + Yield to Maturity)ⁿ)

Using the given values:

• Coupon Payment = $50 (5% of $1,000)
• Yield to Maturity = 6.42% (0.0642)
• n = 30 (15 years * 2 semiannual periods)

Substituting these values into the formula, we can calculate the market price of the bond:

Market Price = ($50 / (1 + 0.0642)³⁰) + ($1,000 / (1 + 0.0642)³⁰)

= $921.25.

Solving this equation, we find that the market price of the bond is approximately $921.25. Therefore, the correct answer is A. $921.25.

Your question is incomplete, but most probably your full question was

A bond that compounds semiannually has a Face Value of $1,000 and maturity of 15 years. Assume that its coupon rate is 5% and yield to maturity (YTM) is 6.42%. What is this bond's market price?

A. $921.25

B. $876.45

C. $864.54

D. $889.24