The price of a ten-year semi-annual pay bond with a par value of $1,000 and a 7.5% annual coupon and yield to maturity of 8.25% is closest to:

Question

Quizplus · Accepted Answer

The price of a bond can be calculated using the present value of its future cash flows, which include the semi-annual coupon payments and the par value at maturity. The annual coupon payment is 7.5% of $1,000, which equals $75 per year or $37.50 every six months. Since the bond pays semi-annually and has a 10-year maturity, there are 20 periods. The yield per period is half the annual yield, so 8.25% / 2 = 4.125%. Using the present value formula for an annuity (for the coupon payments) and the present value formula for a single sum (for the par value), the bond's price can be calculated. The closest answer to the calculated price is $949.60.

The Price of a Ten-Year Semi-Annual Pay Bond with a Par