Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of twenty years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond?

Question

Quizplus · Accepted Answer

To calculate the price Julia paid for the bond, we need to use the present value formula: 
PV = C * (1 - 1 / (1 + r)^n) / r + F / (1 + r)^n 
Where PV is the present value, C is the annual coupon payment (which is $100 in this case), r is the yield to maturity (which is 12 percent), n is the number of periods (which is 4 years), and F is the face value (which is $1,000). 
Plugging in the values, we get: 
PV = 100 * (1 - 1 / (1 + 0.12)^4) / 0.12 + 1000 / (1 + 0.12)^4 
PV = $93.93 + $846.32 
PV = $940.25 
Therefore, Julia paid $940.25 for the bond, which is closest to option C ($939.25).

Julia Just Purchased a $1,000 Par Value Bond with a 10