Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of 20 years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond?

Question

Quizplus · Accepted Answer

To solve, we need to calculate the present value of the bond, which is the price Julia paid. Using the formula: 
PV = C * (1 - (1 + r/n)^(-n*t)) / (r/n) + FV / (1 + r/n)^n*t 
where PV is the present value, C is the annual coupon payment, r is the yield to maturity, n is the number of coupon payments per year, t is the number of years, and FV is the face value. 
Plugging in the values, we get: 
PV = 100 * (1 - (1 + 0.12/2)^(-2*4)) / (0.12/2) + 1000 / (1 + 0.12/2)^(2*4) 
PV = $939.25, which means Julia paid $939.25 for the bond. 
Therefore, the correct answer is C.

Julia Just Purchased a $1,000 Par Value Bond with a 10