Question

J&J Manufacturing issued a bond with a $1,000 par value. The bond has a coupon rate of 7% and makes payments semiannually. If the bond has 20 years remaining and the annual market interest rate is 9.4%, what will the bond sell for today?
a. $761b. $787c. $746d. $785e. $796

Answer 1

Answer:

The correct option is d. $ 785

Step-by-step explanation:

Since,

$\text{Bond price}=\frac{C}{YTM}(1-\frac{1}{(1+\frac{YTM}{2})^{2M}})+\frac{FV}{(1+\frac{YTM}{2})^{2M}}$

Where,

C = Annual coupon payment,

FV = Face value,

M = Maturity in years,

YTM = yield to maturity,

Here,

FV = $ 1,000,

C = 7% of 1000 = $\frac{7\times 1000}{100}$ = 70,

M = 20 years,

YTM = 9.4% = 0.094,

By substituting the values,

$\text{Bond price}=\frac{70}{0.094}(1-\frac{1}{(1+\frac{0.094}{2})^{40}})+\frac{1000}{(1+\frac{0.094}{2})^{40}}$

= $ 785.3454  ( Using calculator )

≈ $ 785

Hence, OPTION d. is correct.