USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
XLR Corporation just issued a $1,000 par value bond with a 7 percent yield to maturity, twenty years to maturity, with an 8 percent semi-annual coupon rate.
-Refer to Exhibit 12.2. If market interest rates rise to 10 percent, what will the price of the XLR Corporate bond be in three years?
A) $832.89
B) $838.07
C) $1097.63
D) $1,102.85
E) $1,191.43

Question

Quizplus · Accepted Answer

To find the price of the bond in three years, we need to use the following formula:

Bond Price = (Coupon Payment / (1 + Market Interest Rate)^Number of Coupon Payments) + (Face Value / (1 + Market Interest Rate)^Number of Years to Maturity)

First, we need to calculate the coupon payment, which is 8% of the par value and is paid semi-annually:

Coupon Payment = ($1,000 x 8%) / 2 = $40

Next, we need to calculate the number of coupon payments in three years, which is six (since there are two coupon payments per year):

Number of Coupon Payments = 2 x 3 = 6

We also need to calculate the number of years to maturity in three years, which is 17:

Number of Years to Maturity = 20 - 3 = 17

Now we can plug all of these values into the formula:

Bond Price = ($40 / (1 + 10%/2)^6) + ($1,000 / (1 + 10%/2)^17) = $838.07

Therefore, the best choice is B.