WPI has a bond issue outstanding that has a coupon rate of 10% and a current yield of 11%. The yield to maturity on this bond is 12%. What is the market price, to the nearest dollar, of the WPI bond if it pays interest semiannually and has 10 years to mature?
A) $941
B) $1,021
C) $1,000
D) $885

Question

Quizplus · Accepted Answer

Using the formula for present value of a bond: 
PV = (C / (1 + r)^1) + (C / (1 + r)^2) + … + (C + FV) / (1 + r)^n

Where:
C = coupon payment
r = required rate of return
FV = face value
n = number of periods

Substituting the given values:
C = 0.10 x 1000 / 2 = $50
r = 12% / 2 = 6%
n = 10 x 2 = 20

PV = (50 / (1.06)^1) + (50 / (1.06)^2) + … + (50 + 1000) / (1.06)^20
PV = $942.85

The nearest dollar to $942.85 is $885, which is choice (D).

WPI Has a Bond Issue Outstanding That Has a Coupon