Party Time has a 6% coupon bond that matures in 11 years.The bond pays interest semiannually. What is the market price of a €1,000 face value bond if the yield to maturity is 12.9%?

Question

Quizplus · Accepted Answer

Step 1: Determine the number of semi-annual periods left until maturity: 
11 years x 2 = 22 semi-annual periods left until maturity.

Step 2: Determine the semi-annual coupon payment: 
6% coupon rate / 2 = 3% semi-annual coupon payment.

Step 3: Calculate the present value of the semi-annual coupon payments:

PV of coupon payments = (C x (1 - (1 + r)^-n) / r)

PV of coupon payments = (3% x €1,000 x (1 - (1 + 6.45%)^-22) / 6.45%) 
PV of coupon payments = €376.37

Step 4: Calculate the present value of the principal payment:

PV of principal payment = FV / (1 + r)n 
PV of principal payment = €1,000 / (1 + 6.45%)^22 
PV of principal payment = €224.97

Step 5: Add the present value of the semi-annual coupon payments and the present value of the principal payment to get the market price of the bond:

Market price of bond = PV of coupon payments + PV of principal payment 
Market price of bond = €376.37 + €224.97 = €601.34

Therefore, the best choice is C (€601.34).

Party Time Has a 6% Coupon Bond That Matures in 11