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 will yield 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

First, we need to calculate the semiannual coupon payment. 
Coupon payment = Face value * Coupon rate / 2 = 1,000 * 0.1 / 2 = $50
Next, we need to calculate the present value of the bond's future cash flows using the market yield of 12%. 
PV of future cash flows = [50 / (1 + 0.06)] + [50 / (1 + 0.06)^2] + [50 / (1 + 0.06)^3] + [1,050 / (1 + 0.06)^4] = $899.26
Finally, we need to add the present value of the bond's face value to get the total price that Kevin Oh will get. 
Price = PV of future cash flows + Face value / (1 + market yield / 2)^n = $899.26 + 1,000 / (1 + 0.06)^8 = $937.72 ≈ $938. Therefore, Kevin Oh will get $938 for his bond if he sells it in the current market.

Kevin Oh Is Planning to Sell a Bond That He