Question

POZ Inc. is issuing bonds to finance a new project in Michigan. These bonds are being offered with a face value of $1000, a coupon rate of 8% per year (paid semiannually), and a maturity of 6 years. Find the pure price of each bond if the current market interest rate for similar financial assets is 6% per year (compounded semiannually). Note: round your answer to two decimal places, and do not include spaces, currency signs, plus or minus signs, nor commas.

Answer 1

$1,099.54

Explanation :

As per the data given in the question,

Face value = $1,000

Coupon rate = 8% per year paid semi annual

Time = 6 year × 2 = 12 semiannual period

Coupon payment = 8% × $1,000 × 0.5

= 40

Market interest rate = 6% compounded semiannually is 3% semi annual period

Present value of bond = $40 × (P/A , 3%, 12) + $1,000 × (P/F , 3%, 12)

= $40 × 9.9540 + $1,000 × 0.7013798802

= $398.16 + $701.38

= $1,099.54

We simply applied the above formula