Consider a bond with £1000 face value and pays 7% semiannually and has 8 years to maturity.The market requires an interest rate of 8% on bonds of this risk.What is this bond's price?

Question

Quizplus · Accepted Answer

First, calculate the number of semi-annual periods until maturity: 8 years x 2 = 16 periods.

Next, calculate the semi-annual coupon payment: £1000 x 7% / 2 = £35.

Using the formula for the present value of an ordinary annuity, with n = 16, i = 4% (semi-annual interest rate), and PMT = £35:

PV=(1-1/(1+i)^n)/i xPMT

PV= £35 x (1-1/(1+0.04)^16)/0.04

PV = £425.76

Using the formula for the present value of a future lump sum, with n = 16, i = 4% (semi-annual interest rate), and FV = £1000:

PV=FV/(1+i)^n

PV = £1000 / (1+0.04)^16

PV = £550.98

Finally, add the present values of the coupon payments and face value to get the bond's price:

Price = £425.76 + £550.98 = £976.74

Therefore, the answer is C) €941.74.

Consider a Bond with £1000 Face Value and Pays 7