Assume an investor is considering purchasing an 8 percent semiannual bond with 8 years remaining to maturity when market rates are 6%. The bond's value is closest to:

Question

Quizplus · Accepted Answer

The bond's value is calculated by discounting the bond's cash flows (coupon payments and face value) at the market rate. Since the bond's coupon rate is higher than the market rate, the bond will be valued at a premium. The bond pays $40 every six months (8% of $1,000 annually, divided by 2), and the present value of these payments plus the face value discounted at the market rate of 3% per period (6% annually, divided by 2) results in a value closest to $1,126.

Assume an Investor Is Considering Purchasing an 8 Percent Semiannual