The Seaside Inn has bonds outstanding with a par value of $1,000 each and a 4.30% coupon. The bonds mature in 7.5 years and pay interest semiannually. What is the current value of each of these bonds if the yield to maturity is 5.0%?

Question

Quizplus · Accepted Answer

Using a financial calculator or Excel spreadsheet function, the present value of the bond's future cash flows can be calculated as follows:

N = 15 (7.5 years x 2 semiannual periods per year)
I/Y = 2.5% (5.0% yield to maturity / 2 because of semiannual periods)
PMT = $21.50 ($1,000 par value x 4.30% coupon rate / 2 semiannual periods per year)
FV = $1,000 (par value)

PV = $956.67

Therefore, the current value of each bond is $956.67. The closest answer choice is B ($956.67), so that is the best choice.

The Seaside Inn Has Bonds Outstanding with a Par Value