A 5.5 percent $1,000 bond matures in 7 years, pays interest semiannually, and has a yield to maturity of 6.23 percent. What is the current market price of the bond?

Question

Quizplus · Accepted Answer

To calculate the price of the bond, we need to use the present value formula:

PV = (C/2) * [1 - (1 + r/2)^(-n*2)] / (r/2) + 1000 / (1+r/2)^n

Where:
C/2 = semi-annual coupon payment
r/2 = semi-annual yield to maturity
n*2 = number of semi-annual periods (i.e. years x 2)

Plugging in the values given:

PV = (27.5) * [1 - (1 + 0.03115)^(-14)] / 0.03115 + 1000 / (1+0.03115)^14
PV = $959.09

Therefore, the current market price of the bond is $959.09, which is closest to answer choice (C).

A 55 Percent $1,000 Bond Matures in 7 Years, Pays Interest