Stanley Richards is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis and has a face value of $1,000.The current market rate for similar bonds is 9.8 percent.At what price should the bond be trading? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

The bond price is calculated using the present value of future cash flows, which includes the present value of the coupon payments and the face value. Given the bond pays a 10% coupon semiannually, the coupon payment is $50 every six months. The market rate is 9.8% annually, or 4.9% semiannually. Using the present value formula for each cash flow and summing them gives a price of approximately $1,048.

Stanley Richards Is Interested in Buying a Five-Year Bond That