USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with five years to maturity and a 6 percent coupon has a yield to maturity of 8 percent. Interest is paid semiannually.
-Refer to Exhibit 13.1. Calculate the current price of the bond.
A) $1579.46
B) $918.89
C) $789.29
D) $1000
E) $743.29

Question

Quizplus · Accepted Answer

The current price of the bond can be calculated using the formula for the present value of an annuity (for the semiannual coupon payments) plus the present value of a lump sum (for the par value at maturity). The semiannual coupon payment is $30 ($1000 * 6% / 2), there are 10 periods (5 years * 2), and the semiannual yield is 4% (8% / 2). Using these values, the calculation is as follows: Present value of annuity (coupon payments) = $30 * [(1 - (1 + 0.04)^-10) / 0.04] = $246.89 Present value of lump sum (par value) = $1000 / (1 + 0.04)^10 = $672.00 Adding these two components gives the current price of the bond: $246.89 + $672.00 = $918.89.