Two years ago bonds were issued with 10 years until maturity,selling at par,and a 7% coupon.If interest rates for that grade of bond are currently 8.25%,what will be the market price of these bonds?

Question

Quizplus · Accepted Answer

To calculate the market price of these bonds, we need to use the bond pricing formula:

Market price = (coupon payment / (1 + interest rate) ^ period) + (coupon payment / (1 + interest rate) ^ period) + ... + (coupon payment + par value / (1 + interest rate) ^ period)

Here, the coupon payment is 7% of the par value, which is $1,000, so it's $70. The period is 10 years.

Plugging in the values:

Market price = ($70 / (1 + 0.0825) ^ 1) + ($70 / (1 + 0.0825) ^ 2) + ... + ($70 / (1 + 0.0825) ^ 10) + ($1,000 / (1 + 0.0825) ^ 10)
Market price = $928.84

Therefore, the best choice is B.

Two Years Ago Bonds Were Issued with 10 Years Until