The bond quote of a 15-year, 7 percent, semi-annual coupon bond when the market rate is 5 percent is closest to:

Question

Quizplus · Accepted Answer

The bond quote represents the present value of the bond's future cash flows, which include the semi-annual coupon payments and the principal repayment at maturity, discounted at the market rate. Given the bond pays a 7% annual coupon on a semi-annual basis, the semi-annual coupon rate is 3.5% (7% / 2). The market rate of 5% annually is equivalent to 2.5% semi-annually (5% / 2). The bond's present value can be calculated using the formula for the present value of an annuity (for the coupon payments) plus the present value of a lump sum (for the principal repayment). The calculation shows that the bond's value exceeds its par value, indicating a premium bond, which aligns with option D, 120.93, as the closest value. This is because the bond's coupon rate is higher than the current market rate, making it more valuable.

The Bond Quote of a 15-Year, 7 Percent, Semi-Annual Coupon