What is the value of a 10 percent semi-annual coupon bond with a par value of $1,000 that matures in 5 years and has a required rate of return of 9 percent?

Question

Quizplus · Accepted Answer

Firstly, calculate the number of coupon payments: 
Number of coupon payments = 5 * 2 = 10

Next, calculate the coupon payment per period: 
Coupon payment per period = 10% * $1,000 / 2 = $50

Then, calculate the present value of each coupon payment using the required rate of return of 9%: 
PV of coupon payments = $50 / (1 + 0.045)^1 + $50 / (1 + 0.045)^2 + ... + $50 / (1 + 0.045)^10
PV of coupon payments = $436.56

Finally, calculate the present value of the face value or maturity value using the required rate of return of 9%: 
PV of face value = $1,000 / (1 + 0.045)^10
PV of face value = $604.00

The total present value of the bond is the sum of the present value of the coupon payments and the present value of the face value: 
Total PV of bond = $436.56 + $604.00 = $1,040.56

Therefore, the closest answer choice is C) $1,039.56.

What Is the Value of a 10 Percent Semi-Annual Coupon