Rick bought a bond when it was issued by Macroflex Corporation 14 years ago.The bond, which has a R1,000 face value and a coupon rate equal to 10 percent, matures in six years.Interest is paid every six months; the next interest payment is scheduled for six months from today.If the yield on similar risk investments is 14 percent, what is the current market value (price) of the bond?

Question

Quizplus · Accepted Answer

The bond's price is calculated using the present value of its future cash flows, which include semi-annual interest payments and the face value at maturity. With a 10% annual coupon rate, the semi-annual coupon payment is R50. The yield of 14% annually translates to 7% semi-annually. Using the formula for the present value of an annuity and a lump sum, the bond's price is approximately R841.15.

Rick Bought a Bond When It Was Issued by Macroflex