Ameritech has just issued a $1,000 par value bond that will mature in 10 years. This bond pays interest of $45 every six months. If the annual yield to maturity of this bond is 8%, what is the price of the Ameritech bond if the market is in equilibrium?

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The bond pays $45 every six months, so the semi-annual yield is 4% (8% annual yield divided by 2). The bond has 20 periods (10 years * 2). The price is calculated using the present value of annuity formula for the interest payments and the present value of a lump sum for the par value, resulting in approximately $1,067.96.

Ameritech Has Just Issued a $1,000 Par Value Bond That