An investor who owns a bond with a 9% coupon rate that pays interest semi-annually and matures in three years is considering its sale. If the required rate of return on the bond is 11%, the price of the bond per 100 of par value is closest to:

Question

Quizplus · Accepted Answer

The correct answer is A because the price of the bond is closest to 95.00. The bond has a 9% coupon rate and pays interest semi-annually, so the semi-annual coupon payment is $4.50. The bond matures in three years, so there are six semi-annual periods remaining. The required rate of return on the bond is 11%, so the semi-annual discount rate is 5.5%. The price of the bond can be calculated using the following formula:Bond Price = (Semi-annual Coupon Payment / Semi-annual Discount Rate) * (1 - (1 + Semi-annual Discount Rate)^(-Number of Semi-annual Periods))Plugging in the values, we get:Bond Price = ($4.50 / 0.055) * (1 - (1 + 0.055)^(-6))Bond Price = $81.82 * (1 - 0.7424)Bond Price = $81.82 * 0.2576Bond Price = $21.15The price of the bond per 100 of par value is $21.15, so the price of the bond is closest to 95.00.

An Investor Who Owns a Bond with a 9% Coupon