Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a $1,000 face value and a coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next interest payment is scheduled for six months from today. Assuming the yield on similar risk investments is 14 percent, calculate the current market value (price) of the bond.

Question

Quizplus · Accepted Answer

To calculate the current market value of the bond, we need to calculate the present value of all future cash flows (interest payments and principal).
First, we need to calculate the semi-annual coupon payment:

Coupon payment = Face value x Coupon rate / 2
Coupon payment = $1,000 x 10% / 2 = $50

Next, we need to find the present value of each of the 12 semi-annual coupon payments and the final principal payment. We can use the formula for the present value of an annuity and the present value of a single sum to calculate these values:

PV of annuity = Coupon payment / (1 + yield/2)^n * 2
PV of single sum = Face value / (1 + yield/2)^n * 2

where n is the number of semi-annual periods remaining until maturity (in this case, 12), and yield is the annual yield divided by 2 (in this case, 14% / 2 = 7%).

PV of coupon payments = ($50 / (1 + 0.07)^1) + ($50 / (1 + 0.07)^2) + ... + ($50 / (1 + 0.07)^12)
PV of coupon payments = $517.22

PV of principal payment = ($1,000 / (1 + 0.07)^12)
PV of principal payment = $323.93

Finally, we can add up the present values of all future cash flows to get the current market value of the bond:

Market value = PV of coupon payments + PV of principal payment
Market value = $517.22 + $323.93
Market value = $841.15

Therefore, the correct answer is A) $841.15.

Rick Bought a Bond When It Was Issued by Macroflex