Which of the following amounts is closest to the value of a bond that pays $55 semiannually and has an effective semiannual interest rate of 5%? The face value is $1,000 and the bond matures in 3 years. There are exactly six months before the first interest payment.
A) $888
B) $1,000
C) $1,014
D) $1,025
E) $1,055

Question

Quizplus · Accepted Answer

The bond's price is closest to $1,025. The bond's present value is the sum of the present values of its future cash flows. The future cash flows are the semiannual interest payments of $55 and the face value of $1,000 at maturity. The present value of the future cash flows is calculated using the effective semiannual interest rate of 5%.

Which of the Following Amounts Is Closest to the Value