Which of the following amounts is closest to the value of a bond described in The Wall Street Journal as 7s 2019? It is exactly ten years until maturity and the appropriate interest rate is 13%.Assume that the bond matures in the same month as when the quote is given,that interest payments are made twice a year,and that an interest payment has just been made.

Question

Quizplus · Accepted Answer

The "7s" in the bond description refers to the coupon rate, which is 7%. Since interest payments are made twice a year, the semi-annual coupon payment is $35 ( = 0.07 * $1,000 / 2). The bond will make 20 semi-annual payments (2 payments per year for 10 years). Using the present value of an annuity formula with a 13% interest rate and 20 periods, we can calculate the present value of the bond's future cash flow to be $667.57. Adding the present value of the final principal payment of $1,000 gives a total value of $1,667.57. However, since an interest payment has just been made, we need to subtract the most recent coupon payment of $35 to get the value of the bond today, which is $669.57. Therefore, the closest amount is $669.44.

Which of the Following Amounts Is Closest to the Value