Question

Roadside Markets has 6 percent coupon bonds outstanding that mature in 10 years. The bonds pay interest semiannually. What is the market price of the bond if the face value is $1,000 and the yield to maturity is 8 percent? Group of answer choices $1077.22 $864.10 $1071.06 $928.94

Answer 1

Answer:

The price of the bonds = $864.10

Explanation:

The value of the bond is the present value (PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV) discounted at the yield rate  

Value of Bond = PV of interest + PV of RV  

The PV of interest payment  

A ×(1- (1+r)^(-n))/r  

A- interest payment, r- interest rate, n- number of years

Interest payment = 6%× 1000 1/2=$30

Semi- interest yield = 8%/2 = 4%

PV = 30 × (1- 1.04^(-10×2))/0.04= 407.7

PV of redemption value  

PV = RV× (1+r)^(-n)  

RV- Redemption value - 1,000, r- interest rate, number of years, number of years- 3

PV = 1000× 1.04^(-10×2) = 456.3869462

The value of bond = 407.709  + 456.38 = 864.09

The price of the bonds = $864.10