A 10-year bond pays 8% annual interest (paid semi-annually).If similar bonds are currently yielding 6% annually,what is the market value of the bond?

Question

Quizplus · Accepted Answer

To find the market value of the bond, we need to use the present value formula:
PV = (C/r) * [1 - 1/(1+r)^n] + FV/(1+r)^n
where PV is the present value, C is the coupon payment (which is 8% * $1,000/2 = $40), r is the semi-annual discount rate (which is 6%/2 = 3%), n is the number of semi-annual periods (which is 10 years * 2 = 20), and FV is the face value (which is $1,000).

Plugging in the values:
PV = ($40/0.03) * [1 - 1/(1+0.03)^20] + $1,000/(1+0.03)^20
PV ≈ $1,148.77

Therefore, the best choice is C, with a market value of $1,148.77.

A 10-Year Bond Pays 8% Annual Interest (Paid Semi-Annually)