An investor purchases a 20-year,$1,000 par value bond that pays semiannual interest of $40.If the semiannual market rate of interest is 5%,what is the current market value of the bond?
A)$ 828.
B)$1,686.
C)$1,000.
D)$ 893.

Question

Quizplus · Accepted Answer

The bond pays $40 every six months, which is an 8% annual coupon rate. The semiannual market rate is 5%, so the bond's price is calculated using the present value of annuities and the present value of the par value. The bond's price is lower than its par value because the coupon rate is less than the market rate.

An Investor Purchases a 20-Year,$1,000 Par Value Bond That Pays