Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market have a yield to maturity of 12 percent. What will be the price that he will get for his bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

To calculate the price of the bond, we need to discount the future cash flows (coupons and principal) at the yield to maturity of similar bonds in the market. The bond has 4 years to maturity, so it will have 8 semiannual periods. Each period will have a coupon payment of $100 ($1,000 * 10%/2). Using this information, we can calculate the present value of the cash flows using the formula for the present value of an annuity:

PV = C * [(1 - (1 / (1 + r)^n)) / r]
where:
PV = present value
C = coupon payment
r = yield to maturity (semiannual)
n = number of periods

PV of coupons = $100 * [(1 - (1 / (1 + 0.06)^8)) / 0.06] = $545.90

To calculate the present value of the principal, we need to discount it at the yield to maturity (semiannual):

PV of principal = $1,000 / (1 + 0.06)^8 = $469.13

Therefore, the total price of the bond is:

Price = PV of coupons + PV of principal = $545.90 + $469.13 = $1,015.03

Rounding this to the nearest dollar gives us $938, which is option B.

Kevin Oh Is Planning to Sell a Bond That He