Riordan Inc. has a bond outstanding that has a $1,000 par value, semiannual coupon rate of 4% and a current yield of 7.9%. What is the price of the bond? (Round to nearest $)

Question

Quizplus · Accepted Answer

The bond pays a semiannual coupon of 4% of $1,000 or $40 per year ($20 every six months). The current yield is 7.9%, so the annual coupon payment of $40 represents 7.9% of the bond price. Setting up an equation: 
$40 / 0.079 = x, where x is the bond price
x = $506.33 (the present value of the semiannual payments)
However, because the bond has a $1,000 par value, there are two semiannual payments per year, so we need to double the present value: 
$506.33 x 2 = $1,012.66
Rounding to the nearest dollar gives us the answer of $1,013. Therefore, the correct answer is Choice C.