A company issues 12%, 10-year $1,000 bonds paying interest semiannually. Required return for bonds of this risk is 15%. At what price will the bond be sold (pick closest answer)?
A)$663
B)$849
C)$847
D)$894

Question

Quizplus · Accepted Answer

First, we need to calculate the semi-annual coupon payment:
Coupon payment = 12% * $1,000 / 2 = $60
Next, we need to calculate the present value of the bond using the following formula:
PV = (C / (1+r)^1) + (C / (1+r)^2) + ... + (C + Par / (1+r)^n)
where:
C = coupon payment = $60
r = required semi-annual rate = 15% / 2 = 7.5%
n = number of semi-annual periods = 10 years * 2 = 20
Par = face value of the bond = $1,000
Using a financial calculator or Excel, we can find that the present value of the bond is $847. Therefore, the closest answer is C) $847.

A Company Issues 12%, 10-Year $1,000 Bonds Paying Interest Semiannually