Assuming an 8% return, compounded semi-annually, what is the market value of a 12% coupon bond with three years to maturity?
A)$1,000.00
B)$1,104.84
C)$1,419.68
D)$1,809.35
E)$2,000.00

Question

Quizplus · Accepted Answer

The bond has a 12% coupon rate, which means it pays $120 per year ($1,000 x 12%). The bond has three years to maturity, so it will make six semi-annual payments ($120/2 = $60 per payment). Using the formula for the present value of a bond, the market value is:
MV = ($60 / (1 + (0.08/2))^1) + ($60 / (1 + (0.08/2))^2) + ($60 / (1 + (0.08/2))^3) + ($60 / (1 + (0.08/2))^4) + ($60 / (1 + (0.08/2))^5) + ($1,060 / (1 + (0.08/2))^6)
MV = $1,104.84 (rounded to the nearest penny)

Assuming an 8% Return, Compounded Semi-Annually, What Is the Market