Final answer:
By calculating the present value of the final payment and face value of the bond with a nominal yield of 5.5%, the minimum selling price of the bond would be approximately $1,034.89.
Step-by-step explanation:
To calculate the minimum selling price of a bond that pays an annual interest rate of 6% compounded semiannually, held for two years, and with a desired nominal yield of 5.5% per year compounded semiannually, we need to take into consideration the future value of the bond's payments, and the present value of the bond's expected selling price.
For simplicity, let's assume the bond has a face value of $1,000. In two years, the bond will pay interest twice a year, making it a total of four payments. Each payment would be $30 (3% of $1,000) as the bond is compounded semiannually. Over two years, the total interest received would be $120 (4 * $30).
To find out how much the bond should be sold for after two years to meet the desired yield of 5.5%, we look at the present value of that yield compounded semiannually. The present value formula is:
PV = C / (1 + r/n)^(nt)
where C is the future cash flows, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the number of years.
If we present value the face value of $1,000 due at maturity plus the last interest payment of $30, we get:
PV = $1,030 / (1 + 0.055/2)^(2*2)
By calculating this present value, we can find out the minimum selling price of the bond. In this case, our desired yield of 5.5% requires a present value of approximately $1,034.89, which is Answer B.