Question

Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bon?

a. $1, 099.
b. $982
c. $1.048
d. $965

Answer 1

c. $1.048

Step-by-step explanation:

Assuming face value to be $1000

Semi annual coupon = (10% of 1000) / 2 = 50

Number of periods = 5 * 2 = 10

Semi annual rate = 8.8% / 2 = 4.4%

Current price = Coupon * [1 - 1 / (1 + r)^n] / r + FV / (1 + r)^n

Current price = 50 * [1 - 1 / (1 + 0.044)^10] / 0.044 + 1000 / (1 + 0.044)^10

Current price = 50 * [1 - 0.650122] / 0.044 + 650.122225

Current price = 50 * 7.951768 + 650.122225

Current price = 397.5884 + 650.122225

Current price = 1047.710625

Current price = $1,048