Answer:
The price of the Bond is $937.9
Explanation:
Price of bond is the present value of future cash flows, The coupon payment and the face value are discounted separately and added together to make the price of the bond. To calculate Price of the bond use following formula
Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]
As the payments are made on semiannual basis so, all the calculation will be made accordingly
Assuming Face value of the bond is $1,000.
Coupon payment = 1000 x 10% = $100 annually = $50 semiannually
Number of periods = n = 4 years x 2 = 8 periods
Yield to maturity = 12% annually = 6% semiannually
Price of the Bond =$50 x [ ( 1 - ( 1 + 6% )^-8 ) / 6% ] + [ $1,000 / ( 1 + 6% )^8 ]
Price of the Bond = $50 x [ ( 1 - ( 1.06 )^-8 ) / 0.06 ] + [ $1,000 / ( 1.06 )^8 ]
Price of the Bond = $310.49 + $627.41
Price of the Bond = $937.9
