A $1000 face value bond,with coupon rate of 9% paid annually,has six years to maturity.If bonds of similar risk are currently earning 11%,what is the current price of the bond?

Question

Quizplus · Accepted Answer

The current price of the bond can be calculated using the formula:

Bond price = (Coupon payment / (1 + r)^1) + (Coupon payment / (1 + r)^2) + ... + (Coupon payment + Face value / (1 + r)^n)

where r is the current yield to maturity and n is the number of years to maturity.

In this case, the coupon payment is $90 (9% of $1000), the face value is $1000, the current yield to maturity is 11%, and n is 6.

Plugging these values into the formula, we get:

Bond price = (90 / (1 + 0.11)^1) + (90 / (1 + 0.11)^2) + ... + (90 + 1000 / (1 + 0.11)^6)
Bond price = $915.39

Therefore, the best choice is A, with the explanation that the current price of the bond is $915.39.

A $1000 Face Value Bond,with Coupon Rate of 9% Paid