Hampton Construction Inc.has issued 20-year semiannual coupon bonds with a face value of $1,000.If the annual coupon rate is 12% and the current yield to maturity is 10%,what is the firm's current price per bond?

Question

Quizplus · Accepted Answer

To calculate the current price per bond, we need to use the following formula:

PV = (C / r) x (1 - 1 / (1 + r)^n) + F / (1 + r)^n

Where:
PV = present value or current price per bond
C = annual coupon payment / 2 (since the coupon is paid semiannually)
r = yield to maturity / 2 (since the yield is given as an annual rate)
n = number of semiannual periods or 20 years x 2 = 40
F = face value or $1,000

Plugging in the values, we get:

PV = (60 / 0.05) x (1 - 1 / 1.05^40) + 1000 / 1.05^40
PV = 1171.59

Therefore, the current price per bond is $1,171.59. Choice C is the correct answer.