Question

A 10,000 par value bond with coupons at 8%, convertible semiannually, isbeing sold 3 years and 4 months before the bond matures. The bond is redeemable at $C, and purchase will yield 6% convertible semiannually to the buyer. The price of the bond was $5,640 three years and six months before maturity (immediately after the coupon payment).

Required:
Calculate the market price of the bond, assuming compound interest throughout.

Answer 1

$5,563

Step-by-step explanation:

Calculation to determine the market price of the bond

First step is to calculate price of the bond 3 years and 4 months before the bond matures

Bonds price=$5,640 (1.03)^2/6

Bonds price=$5,695.84

Second step is to calculate the accrued coupon

Accrued coupon=1,000(8%/2)[(1.03)^2/6−1÷0.03

Accrued coupon=1,000(.04)[(1.03)^2/6−1÷0.03]

Accrued coupon=400[(1.03)^2/6−1÷0.03]

Accrued coupon=$132.02

Now let determine the the market price of the bond

Market price of Bond=$5,695.84−$132.02

Market price of Bond=$5,563

Therefore the market price of the bond is $5,563