USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7 percent coupon, matures in two years, has a yield to maturity of 8 percent, and a face value of $1,000. Bond B pays an annual 8 percent coupon, matures in three years, has a yield to maturity of 9 percent, and a face value of $1,000.
-Refer to Exhibit 13.14. Calculate the price of Bond A.
A) $975.62
B) $982.17
C) $990.57
D) $1,009.50
E) $1,018.08

Question

Quizplus · Accepted Answer

The price of Bond A can be calculated using the present value formula for bonds, which is the sum of the present value of the coupons and the present value of the face value. The annual coupon payment is 7% of $1,000, which is $70. The yield to maturity is 8%. The bond matures in two years. The price of Bond A is calculated as follows:$$ \text{Price of Bond A} = \frac{\$70}{(1+0.08)} + \frac{\$70}{(1+0.08)^2} + \frac{\$1,000}{(1+0.08)^2} $$$$ \text{Price of Bond A} = \$64.81 + \$60.01 + \$857.34 $$$$ \text{Price of Bond A} = \$982.17 $$Therefore, the correct answer is $982.17.