Wine and Roses,Inc.offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%.The bonds mature in 10 years.What is the market price of a $1,000 face value bond?

Question

Quizplus · Accepted Answer

To calculate the market price of the bond, we need to use the following formula:
PV = (C/2)*(1 - (1/(1+y/2)^n))/(y/2) + 1000/(1+y/2)^n
where:
PV = present value or market price of the bond
C = coupon payment = 0.07*1000/2 = $35 (semi-annual coupon payment)
y = yield to maturity = 7.73%/2 = 0.03865
n = number of semi-annual periods = 10*2 = 20
Plugging in these values, we get:
PV = (35/(1.03865)^1 + 35/(1.03865)^2 + ... + 35/(1.03865)^20) + 1000/(1.03865)^20
PV = $949.80
Therefore, the market price of the bond is $949.80, which corresponds to choice B.