Question

Wine and Roses, Inc., offers a bond with a coupon of 5.0 percent with semiannual payments and a yield to maturity of 5.90 percent. The bonds mature in 10 years. What is the market price of a $1,000 face value bond?

Answer 1

$932.7

Step-by-step explanation:

First step

Semi- annual coupon rate = 5.0%/2 = 2.5%

Interest payment = 2.5% × $1,000 = $25

Semi annual yield = 5.90%/2 = 2.95%

PV of interest payment

= A × [1-(1+r)^(-n)]/r

A means interest payment of $25

n means to maturity -10×2 = 20 periods

= $25 × [1-(1+0.0295)^(-10×2)]/0.0295

= $25 × [1-(1.0295)^(-20)]/0.0295

= $25 × 14.94648325

= $373.6620813

Second step

PV of redemption value RV

= RV × (1+r)^(-n)

= 1,000 × (1+0.0295)^(-10×2)

= 1,000 × 0.5590787441

= $559

Third step

Price of bond

= $373.7 + $559

= $932.7