Exhibit 12-1
THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)
A $1000 par value bond with 5 years to maturity and a 6% coupon has a yield to maturity of 8%. Interest is paid semiannually.
-Refer to Exhibit 12-1. Calculate the current price of the bond.
A) $1579.46
B) $918.89
C) $789.29
D) $1000
E) $743.29

Question

Quizplus · Accepted Answer

The current price of the bond can be calculated using the formula for the present value of an annuity (for the semiannual interest payments) plus the present value of a lump sum (for the par value at maturity). The semiannual interest payment is $1000 * 6% / 2 = $30. There are 10 periods (5 years * 2) and the semiannual yield is 8% / 2 = 4%. The present value of the annuity (interest payments) is $30 * [(1 - (1 + 0.04)^-10) / 0.04] = $246.89. The present value of the lump sum (par value) is $1000 / (1 + 0.04)^10 = $672. The total current price is $246.89 + $672 = $918.89.

Exhibit 12-1 THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)