Question

A bond has 8 years to maturity, a 7 percent coupon, a $1,000 face value, and pays coupon interest semiannually. What is the bond's current price if the yield to maturity is 6.91 percent?

a. $799.32
b. $848.16
c. $917.92
d. $1,005.46
e. $1,009.73

Answer 1

Bond Price = $1005.46079 rounded off to $1005.46

Option d is the correct answer

Step-by-step explanation:

To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,

Coupon Payment (C) = 1,000 * 0.07 * 6/12 = $35

Total periods (n) = 8 * 2 = 16

r or YTM = 0.0691 * 6/12 = 0.03455 or 3.455%

The formula to calculate the price of the bonds today is attached.

Bond Price = 35 * [( 1 - (1+0.03455)^-16) / 0.03455] + 1000 / (1+0.03455)^16

Bond Price = $1005.46079 rounded off to $1005.46